FTSE suffers biggest October fall for 21 years

London’s leading share index has suffered its second-worst October ever, despite today closing with a 12.7% surge over the week.

The FTSE 100 Index plunged by 11% this month – the biggest October fall since the 1987 crash, when the top flight fell more than 26% in one month.

Share prices have been decimated by the global financial crisis, which this month cranked up a notch amid mounting bank failures and worldwide recession fears.

This month saw the British government forced into unprecedented action to bail out UK banks, while countries across the world made similar dramatic moves to secure financial institutions.

But recession concerns soon took over from worries over the banking sector, giving stocks a relentless battering.

Justin Urquhart-Stewart, of Seven Investment Management, said it had been a “frightening” month.

“It has been like an earthquake where the very foundations of the financial system were shaking,” he said.

The FTSE 100 endured the biggest one-day fall in its 24-year history, when the top tier plummeted by a devastating 9% on October 10.

Co-ordinated rate cut action – including a 0.5% reduction to 4.5% in the UK - and billions of pounds of cash pumped into the financial system were unable to prevent the blue-chip index from slumping to levels not seen in more than five years.

Stocks this week made an attempt to recover lost ground, bouncing back by 8% on Wednesday ahead of rate cut hopes as America slashed its key rate by another 0.5% to 1%.

But the four-day rally, which saw it close today at 4377.3, was not enough to offset the early October falls, leaving blue chips nursing hefty declines. At the start of the month the index stood at 4902.5.

The banking and insurance sectors are among those worst hit in this month’s heightened volatility.

Embattled Royal Bank of Scotland is the FTSE’s top faller over the month, down 63%.

It has been a month of suffering for the group, left with no option but to turn to the government for State support under the £37bn (€46.85bn) part-nationalisation scheme and seeing its boss Fred Goodwin also step down.

Prudential led mammoth falls for the insurance sector as investors have fretted over their exposure to equities and the potential for corporate bond defaults.

Pru shares have shed 40% since September, with rivals such as Norwich Union parent Aviva not far behind, down 24% with assurances over their capital strength failing to help them recover lost ground.

Mining firms have also been under pressure as the prospect of a recession worldwide is expected to hit demand.

With both the UK and US this month revealing that economic growth slipped into negative territory in the third quarter, investors have piled out of commodities in recent weeks.

Stock market historian David Schwartz said October is fast earning a reputation as a terrible month for equities, renowned for crashes such as 1929 and 1987.

But the reality is different, he said: “October’s reputation is much worse than the reality of the month. If you go back a century, October rises 64% of the time. Even if you factor in 1929 and 1987, prices rise on average by 1% over the month.”

“During the 1990s October went up eight times and fell two times. Between 2000-2007, October rose seven times and fell once, in 2005.”

And Mr Urquhart-Stewart added that investors can take heart from the fact that stock markets usually tend to see their worst falls at the start of a recession.

“Performance will be erratic during a recession, but it will general be more positive than negative,” he said.