October is behind us and the midterms are over. Well, not if you live in Florida, but that’s another matter. Back to the discussion at hand. Investors looking for rest from recent market volatility have yet to find any relief.
Psychology has taken an unsettling turn and multiples have contracted, even as Q3 profit growth has been strong and growth at home remains solid.
Trade tensions, a global economic slowdown that includes China and Europe, Fed worries, and turbulence among the so-called FAANG stocks—Facebook, Apple, Amazon, Netflix, and Google—have darkened the mood. If that weren’t enough, oil prices have taken a dramatic step lower, and investors are grappling with late-cycle jitters.
Elsewhere, Brexit has re-entered the conversation, and Italy’s ongoing budget discussions have rippled across the EU.
Trying to pinpoint the exact reason for instability is difficult. So, the shotgun approach, just list all the reasons, might be the best approach. If I had to pick one reason for the volatility (and there is more than one), I might point my finger at the Fed, as investors may express concerns that a policy mistake is in the making.
However, I’ll hedge my opinion and note we have yet to see much stress in the credit markets, and Treasury yields haven’t budged much.
End result, the NASDAQ and Russell 2000 Index have slipped into correction territory. The Dow and the S&P 500 Index have yet to correct (closing basis).
Short term volatility can be unnerving, especially when market action in recent years has been relatively sanguine.
The long-term data highlight that market pullbacks are normal. Between 1980 and 2017, the average maximum intra-year drawdown in the S&P 500 has been nearly 14% (LPL Research). In 2018, we’re at 10%.
A bigger concern: When economic growth eventually stalls—and it will—and commentary from blue chips turns negative, how might traders react?
