Volatility – “A tendency to change quickly and unpredictably, big swings in either direction”
The month of October has often had a bad reputation for investors and this October was no different. The S&P 500 had its worst month since 2010, and the U.S. market experienced a significant uptick in volatility, with many companies adversely affected. At one point, both the S&P 500 and the Dow Jones Industrial Average briefly entered into “correction” territory, dropping more than 10% below all-time highs.
In these times of market fluctuation, it is important to remember the different types of down markets:
Pullbacks – These are dips of 5% to 9.9%. These periods of adjustment are normal and generally short-lived. The Dow has experienced 395 “pullbacks” since 1900, with losses recouped over an average of six weeks.
Corrections – More significant than a pullback, a correction is when the market suffers a drop of 10% to 19.9%. Corrections are much less frequent, with the S&P 500 only experiencing 22 corrections in the post-war era. Losses experienced during past market corrections have been recovered over an average of four months.
Bear Market – A Bear Market represents a market decline of greater than 20%. These markets have the ability to erase large chunks of the gains from the prior bull market. While these are the most severe instance of a down market, Bear Markets are also the rarest. The average loss in a Bear Market is nearly 40%, with the average decline lasting 21 months.
Factors Contributing to the Market Decline
A substantial sell-off in the technology sector. Six of the largest technology names (Amazon, Apple, Facebook, Google, Microsoft, Netflix) lost a combined $223 billion over the course of a single trading day on October 10th.
Disappointing quarterly corporate earnings for many companies. Nearly 40 percent of companies mentioned the impact of tariffs in forward-looking projections.1 Even companies that reported positive earnings surprises did not experience the positive price change typically associated with earnings beats. Concerns that peak corporate growth might be slowing was apparent.
Recent reports show that the 12-month inflation rate has leveled off at 2%. This current rate indicates that consumers are spending at a rate sufficient enough to keep the economy going strong, and it is in line with the Federal Reserve’s target rate.2 In spite of this stabilization, many sectors and industries are still experiencing varying degrees of price inflation.
The median rent for U.S. home renters declined for the first time since 2012. Since 2012, the average rental price of a U.S. home has increased 14% up to $1,440/month.3 This long-term increase in rental prices has corresponded with inflating home prices. In some major markets, home prices have increased by over 500% over the last 30 years!
Interest rates have moved higher, and many economists are forecasting a fourth interest rate hike in December.
News from emerging and developing markets has been predominantly negative in 2018. Between trade conflicts with China, sanctions against Syria, and the debt crisis in Venezuela, emerging markets have been battered in recent months. Recent statistics show that emerging markets now make up nearly 60% of the World’s GDP, with that number expected to increase.4
Potential Positives for November and December:
November and December of mid-term election years have historically been quite strong. In all years, going back to 1952, the three-month period beginning in November have been the best-performing three months of the year.
International capital is flocking to the higher interest rates offered in the U.S.
Consumer confidence is soaring, leading to increased spending. Christmas retail sales should be strong due to the increase in personal income. Additionally, unemployment is low and job growth is surging.5
1.https://www.cnbc.com/2018/10/24/more-than-one-third-of-sp-500-reporting-earnings-are-talking-tariffs.html
2.https://www.marketwatch.com/story/consumers-spend-more-on-new-cars-and-recreational-goods-in-september-2018-10-29
3. https://www.bloomberg.com/news/articles/2018-10-18/rents-for-u-s-homes-drop-for-first-time-since-2012-zillow-says
4. http://www.economywatch.com/economic-statistics/economic-indicators/GDP_Share_of_World_Total_PPP/
5.https://investorplace.com/2018/11/why-october-decline-is-gift-for-investors/
IMPORTANT DISCLOSURES
Investment advice offered through Strauss Financial Group, Inc., a Registered Investment Advisor.
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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.