October has picked up September’s slack when it comes to volatility. Just six days into the fourth quarter, stocks have had some of the sharpest swings we’ve seen in a while, including yesterday’s big bounce and today’s big drop. I know the choppiness can be unsettling, so I’m sending you this special update to give you my thinking on the recent market action and what it means for us.
If you checked the headlines at all, you know the reasons talked about for today’s selling. Investors are concerned about global economies, and today those concerns focused on Europe. Export data out of Germany was weak, a report said Germany could be on the verge of a recession, and the head of the European Central Bank (ECB), Mario Draghi, said growth is slowing and reform is necessary. In addition, we have ongoing Ebola fears, falling oil prices and the ever-present speculation of when the Fed might start to raise interest rates.
None of this is new, but it all came together today at a time when the markets were due to pull back, and so far in October, the broad market is swinging wildly in comparison to what an unusually complacent summer trained investors to expect. After a blistering second quarter, the market was due a little rebuilding, and early October is often a volatile time of the year.
We’ve been on alert for this possibility for some time, so I’m not surprised. Still, none of us like these days, so let’s talk about where we go from here.
As the old saying goes, you can only go “into” the forest halfway before you technically start coming “out” the other side. Based on the surge in volatility we have seen so far this month, I think we are approaching the halfway point. This is, of course, a mixed blessing, because while it means the sun is on the horizon, we probably have more volatility ahead before what is already becoming a strong earnings season gets critical mass and sentiment finds a solid base on which to rebuild.
Counting today, six sessions in the last two weeks ended with the S&P 500 up or down between 1% and 2%, compared to a historical average of roughly four equally volatile days in a typical month. It wouldn’t surprise me if we see a few 2% to 3% moves as well, as we were right there today.
After today, the S&P 500 is now 4.5% off its recent peak in mid-September. Bear moves of this scale are anything but rare. In fact, we had one just about a year ago when stocks also fell 4.5% in August before beginning a nice rally to end the year.
I fully expect that to happen again this year, even though we may have to get through more volatility before the prospect of a true rebound emerges. Expectations for the new earnings season just getting underway are actually on the low side, and I anticipate results being “good enough” to get investors buying. Interest rates are all but certain to remain historically low through the end of the year, and in addition to the strong historical pattern of rallies from mid-October into the following year, history also tells us that we can expect a pop after the mid-term elections. I saw research recently from Sam Stovall S&P Capital IQ that showed the S&P 500 has gained more than 15% on average in the November to April period following mid-term elections.
We want to stay calm and stay the course in the current volatility, and not join with those who try to pick a bottom. We’ve anticipated this, prepared for it in our investments, and remain on track to profit from a strong finish to the year. The volatility should even give us additional opportunities. We’ll keep a close eye on the headlines out of Europe and other places around the world, and we’ll adjust our strategy if necessary. But for now, the positive factors and historical patterns look strong enough to be the real drivers of stocks in the coming months, and I expect us to be pleased with where we are come the end of the year.