October is famous for two scares; the Halloween celebration and the traumatic stock market crashes of 1929 and 1987.
This year's October has been another scary month again, but with a difference; this time the crash did not begin in October, but already started in mid to late 2007, and gathered impetus until October 2008.
So an important thing to remember at the moment is that the market fall has already been going on for a year, the current crash does not match the descriptions of the previous infamous meltdowns which started in October.
Another important thing to remember is that stock markets do not go down forever.
They generally go up. The reason for this is simple; inflation is almost a given, prices of most things increase over time through inflation, and stocks are as much a measure of prices as inflation because the stock market contains the earnings of companies which produce most of the goods and services in the economy.
The difference with stocks is that they are based on the earnings of companies, which can vary much more than inflation as earnings are also subject to volume and the costs of doing business which can include taxes and interest payments on debts.
Stocks are also subject to the price decisions of the investors who buy and sell them; at any time investors may want to buy more stocks or less stocks than usual.
These factors give stocks their reputation for volatility which can be very high in the short term as earnings expectations and the desire to hold shares changes; Indonesian stocks are currently 40 percent lower than they were at the end of September and it doesn't get much more volatile than that.
So at a time like this it is important to remember that stocks do follow a trend over time. We know that the average annual return for Indonesian shares is almost 24 percent.
This is measured over twenty-five years since 1983. One reason for this high return, thanks to the structure of our economy and financial system, is that Indonesia has always tended to have a high rate of inflation.
This is true at the current time too, inflation is somewhere around twelve percent - this inflation eventually finds its way into share prices. And over time, we would expect stocks to increase by more than inflation because stocks also gain from higher volumes as well as prices and as they go up, more investors want to own them.
If we look at data from the recent equity bull market which started at the end of 2002, it shows that the market may have been rising too fast.
The average return over this period, up to December 2007 shows that Indonesian stocks were returning an average of almost 40 percent over those giddy months, or almost double the long-term average.
Well the bubble has been well and truly burst. In October 2008 it is down almost 60 percent year on year and if we stay around the current levels for just a few more months, the huge negative yearly returns will bring us back to that 24 percent long term average by about March 2009.
The implication being the market will have already fallen enough and we will be back to the average again.
Also worth noting, the period from October to December is normally one of the best for Indonesian stocks.
Over the twenty five years from 1983 to now, investors have been able to make an average return of 10 percent during the fourth quarter, making it the best quarter of the year and almost half of the return for the whole year.
It is actually the third quarter which is regularly the worst. The third quarter gives a negative 2 percent return on average.
Good news then that the third quarter and soon October are behind us.
The worst ever fourth quarter was in 1997 when the rupiah terrified us all the way from 2,450 to 16,000; the entire banking system collapsed pushing interest rates up to 70 percent and the Indonesia political system crumbled after thirty years of stability. That quarter saw a loss of 26 percent.
So far in the current fourth quarter which is less than a third gone, Indonesian stocks are already down 39 percent, and even though the current conditions are serious, they seem unlikely to get as bad as they were in 1997.
While the rupiah has fallen from 9,000 to 11,000 so far, most other currencies have also depreciated more than twenty percent against the dollar, including majors like the euro, pound and Australian dollar.
Many emerging market currencies have fallen forty percent, so this time rupiah weakness is more to do with dollar strength; Indonesia is not alone.
Other simple measures also show stocks are getting oversold. Measured against a slow moving average of two hundred days, Indonesian stocks are more oversold that they have ever been.
The Indonesian stock market 200 day moving average is currently at 2,290 and the index is at 1.112, so the index is trading at 49 percent of its 200 day moving average or 51 percent below the moving average.
Back in the crash of 1997/1998 the market traded as low as 56 percent of its 200 day moving average before rebounding strongly. A rebound is therefore likely again now.
And while in the rest of the world financial conditions appear scary too, there are some signs the outlook here may brighten in the coming months.
Indonesia and Asia are very sensitive to global growth because the domestic economy is relatively weak and we export a lot of commodities to the rest of the world.
The outlook for global growth has fallen very sharply as measured using commodity prices as well as shipping rates (which as a measure of trade show that trading volumes have almost collapsed).
Another way to measure the outlook for global growth is using long term interest rates which are often used to determine the long term growth rate for stocks.
Global interest rates fell sharply in 2007 giving an advance signal of the coming economic slowdown. We saw the U.S. Fed cutting rates aggressively, down now to 1.5 percent and maybe even falling lower this week, from as high as 5.25 percent in 2007.
And while commodities including oil have been under immense pressure, the price of oil still remains at $60 which is three times where it was when Indonesian stocks last had a terrible fourth quarter back in 1997.
While other commodities have not fared so well and the price of palm oil is at the same level it was in 1997, many producers cannot make money at these prices meaning that they are unsustainable and therefore likely to rise again.
Don't let anyone tell you capitalism is dead; we can already see the signs of capitalist financial systems and democratic governments improving the outlook for future growth globally.
Indonesia is now more capitalist and democratic than ever, and helped by this better outlook for global growth from the efforts of other countries, we will see an improvement in the outlook for Indonesian stocks in coming months, just as history and averages show has always happened in the past.
The writer is the head of equity research at Danareksa Sekuritas
