Stocks in October: Believers and Skeptics Face Off

After a strong run-up Thursday followed by a weaker one Friday, major US stock indexes are in retreat.

The Dow, the S&P, the Nasdaq and the Russell 2000 have all surrendered more than 1%, a move attributed, in part, to a realization that the eurozone rescue plan bears a striking resemblance to Gertrude Stein’s description of Oakland: “There is no there there.”

“Politicians have delayed addressing the [eurozone] problem yet again,” says commodities guru and Vancouver veteran Jim Rogers, giving voice to that realization.

“It will come back in a few weeks or a few months,” he told Investment Week, “and the world will still have the same problem, but this time, only worse, because the European Central Bank and other countries will be deeper in debt.

“Most European countries are increasing their debt, rather than decreasing their debt,” Rogers said. “Until that changes, the problems are going to continue, just as they will in the US.”

Too, there’s the realization that past bets on the eurozone can still come back to haunt: thus, the collapse of MF Global, the holding company for a broker-dealer run by Goldman Sachs alum and former New Jersey governor Jon Corzine.

MF Global filed for Chapter 11 bankruptcy this morning, thanks to bad bets on eurozone government debt.

Among other impacts: The New York Fed will have to find someone to take MF Global’s place as a primary dealer — one of 20 megabanks required to bid at every US Treasury auction in exchange for a passel of government privileges.

Even with today’s losses, stocks will, likely, close the month in what the establishment media were touting as “the biggest monthly gain since 1974.”

Claims like this always stir up our skepticism. There was, indeed, a monster rally in October 1974. The S&P rose nearly 18%.

But most of those gains evaporated by Christmas that year.

On the other hand, October 1974 did mark a significant bottom. The S&P was up nearly 50% by early 1976.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning