The falling leaves...

Autumn is a difficult season for the stock market. As the end of year approaches, budgets need to be balanced, income tax payments are looming and the Xmas spending session is not far off. Everyone needs cash, and that often means the sale of equity such as stocks. This annual phase is well known and many wisely anticipate it, by selling beforehand or by deciding to sit it out. What cannot be predicted, however, is the extent of the sell-off. Most years it is just a blip, where stock market indexes fall less than 10% and quickly recover their losses. But very occasionally the cliff is much higher, and the breakage at the bottom is much more extensive. These exceptional events have exceptional causes. Extreme evaluation is one of them. As Keynes noted a long time ago, when the revenue from an investment drops below 2.5% something is going wrong (1). Another factor is the amount of credit and debt in circulation. The more there is, the greater the probability of defaults setting off a chain reaction. Psychology probably plays a part, with general optimism or pessimism helping or aggravating the situation. And global concerns, be they climate disruption, war and peace, COVID, raw materials or currencies, must have some impact. There may be other influential elements, but just these are actually all in the amber or red zones. Autumn 2021 could have one of those “black” days that are recorded in history books.

1. See: https://en.wikipedia.org/wiki/Liquidity_trap