Has the stock market gone a little bonkers lately? During the week of October 7th, the Dow Jones Industrial Average plummeted 272 points on Tuesday, rocketed back 274 points Wednesday and tanked more than 330 points on Thursday.
Since 1928, the S&P 500 has averaged 19 separate 2% moves in a single day. There were 35 such moves in 2011, 56 in 2009, and 72 in 2008 during the worst of the financial crisis. A record 140 moves greater than 2% took place in 1932. To put those numbers in perspective, so far in 2014, we have had just four 2% moves. Source: Wall Street Journal. If it is any consolation, the wide market swings in 1997, 2008, and 2011 led to market surges within six months, so an increase in volatility does not necessarily mean that the market is poised on a precipice. Source: Navellier and Associates.
Still, what is causing October to be so spooky and crazy? Even if we eliminate the possibility that the markets could be haunted, there are various reasons being touted for the volatility, such as the Fed “taking away the punch bowl” by ending its bond buying program, falling oil prices, global slowdown particularly in Europe, rising dollar, or the Ebola outbreak, just to name a few. Whatever the reason for the selloff, the market goes down if there are more people wanting to sell than those wanting to buy.
So what should you do? Probably nothing. Professional traders would love to see you panic into dumping stocks from your portfolio. Don’t be that person. If you have constructed a well-diversified portfolio, remember that your portfolio – by design – has assets that historically do well when other assets decline. And if you have alternative funds in your portfolio, they should help sustain your portfolio during this volatility. As most of you know, when markets get emotional, hitting highs and lows on a daily basis, we at GV get back to fundamentals. Our opportunistic rebalancing process uses market dips as buying opportunities. In this environment dominated by high-frequency robots and complex algorithms, the rule tends to be sell first and ask questions later. Panic and program selling could lead to overreaction on the downside, but markets are often irrational over the short term.
So where do we go from here? Today’s virtually nonexistent inflation pressures, decent corporate earnings, continued share buybacks, and massive financial liquidity could all propel stocks much higher in a flash. The recent news of a drop in September retail sales seems to have sparked a sudden panic in the markets about the outlook for domestic demand in the U.S. But that decline needs to be put in its proper context. Yes, auto sales declined in September, but only after spiking to a nine-year high in August. The trend in underlying sales growth remains strong as well. Remember, too, that this is an economy that created nearly 250,000 jobs in September. Source: Bloomberg.
As Burton G. Malkeil, said in his recent WSJ op-ed, “Are Stock Prices Headed for a Fall?”, “Don’t think you can time the market and sell your stocks now, hoping to get back in later after there is a correction. No one can consistently time the market, and you are more likely to get it wrong than right.” We couldn’t agree more.
Those who try to exit the market’s scary roller coaster are more likely to discover it’s a trick not a treat.