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Trick or Treat, October is here.

BLOG, MARKETS & ECONOMICS  |  11 Oct 2018

By Jon Aldrich

CNBC

I was working out at the gym today and while I was riding the stationary bike I had the privilege of watching the financial media on CNBS (a.k.a. CNBC)  in full meltdown mode. (I took the above picture today while I was riding) Of course, they had the big alert in the lower left screaming “Market Sell-Off“, and if that didn’t frighten you enough, they had to put the big Headline “Stocks on Track for Worst Week Since March“, Oh my!  And if that is not enough to make you climb into your bomb shelter and stock up on canned goods, they show in a big red box at the bottom right how many points down the Dow is going to be when the markets open. Maybe I should just climb into the sauna and sweat this out!

You have heard from me over and over that the financial and news media love a great disaster story and how fear sells. The markets have been so calm for so long, CNBC is glad there is some excitement now, because they know more people are going to be tuning in and having their eyes glued to their big red boxes that they are so fond of. I am sure if it wasn’t for Hurricane Michael yesterday, this would have been the lead story on the evening news.

October is here, and as we all know, October is the scariest month of the year, not only because of Halloween, but also because it seems like market volatility really picks up this time of year as the leaves turn colors and the temperature falls.

Let’s take a step back and assess where things are.

1.) The last few years have been some of the calmest, least volatile years on record for the stock market. Corrections are a normal function of the markets. In fact, on average the stock market “corrects” 10% or more about every 18 months or so. 5% corrections are even more frequent.  So far, this correction has been about 7% for the Dow and the S & P 500. Do you remember just a few months ago, in February of this year? Within a week the Dow dropped over a 1,000 points twice and fell a little over 10% in a couple of weeks. I would be willing to bet a good number of people don’t even remember that. The same thing occurred in January and February of 2016, but that is a distant faded memory for most.

2.) Sure, the Dow Jones Index “plunged” 813 points yesterday and was down over 300 points as I am writing this. Big Deal! 30 years ago those would have been colossal numbers. On Black Monday, October 19, 1987, the Dow fell 508 points, that was a 22% decline in the index in one day. The 813 point drop of yesterday was around 3% of the Dow index.  Since the Dow is much higher now than it was years ago, many people still see these large numbers and freak out, but the magnitude in percentage terms is not really all that large.

I keep mentioning the Dow Jones Index, but I only quote this because this is what most of the media still use to describe the stock market, even though there are much better Indexes available to describe what is going on in the stock market. The Dow Jones Index only contains 30 stocks, hardly a great representative sample of the stock market. A better index to use is the S & P 500, which is essentially the 500 largest U.S stocks. The index actually contains 505 stocks because it contains 2 different share classes from 5 of the companies in the index.

S & P 500A Look at the S & P 500 Year to Date. (Source: stockcharts.com)

However, the S & P 500, just like the Dow Jones, only represent large US companies. If you really want to get the pulse of all the stocks in the U.S. markets (large, mid & small), the Wilshire 5000 is the index to use. It is called the Wilshire 5000 even though it only contains 3,486 companies. This index is designed to track the performance of almost all the publicly traded companies headquartered in the U.S.  The only drawback is that it is much easier to quickly see how the Dow or the S & P 500 are doing because that is what most of the media use. If you are interested in the Wilshire 5000, you can get an instant quote here. By the way, as of the close on October 11, the Wilshire 5000 is down about 7.4% from the highs in September so far.

3.) Most investors don’t have their entire portfolio in the stock market. They generally have a mix of stocks, bonds, real estate, cash, and possibly commodities in a diversified portfolio. As an investor, all you need to be concerned with is the long term results needed for your plan to succeed. Most balanced, diversified portfolios were down much less than 3% yesterday because none of the other asset classes mentioned above that are likely in your portfolio were down anywhere close to 3%.  Diversification can limit your gains when the Dow or S & P are going up, but it surely helps limit your losses when the U.S. markets are tumbling. Yesterday and today and during this whole correction, having a diversified portfolio is surely helping cushion the downside that stocks are experiencing.

CNBCOh No! Will it help if I panic?

4.) There have been some building headwinds in the market that are finally starting to catch up. You have the continuing issue with tariffs and the possibility of an all out trade war with China. Interest rates have spiked up recently, which usually causes stocks to have a hiccup. Technology stocks such as Amazon, Facebook and Netflix which have been providing the majority of the gains in the markets the last couple of years, have finally started to come back to earth a bit. Plus, there is the uncertainty of the upcoming mid-term elections.

On the plus side, there are still a lot of good things happening. We have a very robust economy, inflation is modest, tax rates are favorable for businesses and individuals, and most economic indicators do not show much in the way of recession signs for at least the next year. True the economic recovery from the Great Recession of 2008-2009 is getting long in tooth, since the recovery has not been as robust as most other recoveries, maybe it can run longer?

All in all, this correction looks very similar to the last few corrections we endured the last couple of years. There is likely a few more wild days ahead, but generally when markets fall as precipitously as they have, they bounce back quickly as well.

If you are unsure of how your portfolio is allocated or want to review what your long-term goals are and what type of allocation is appropriate for you, please contact us to schedule a review.