Market Commentary – October 2018
Another wicked October!
First, we had the Panic of 1907, then Black Tuesday in 1929 (and Thursday and Monday), and Black Monday in October 1987, but October 2018 was indeed a month for the record books. With a negative return of -6.94%, it was the third worst October since 1987, and the 19th worst month in over 30 years. (For the curious among you, October 1987 the S&P 500 lost -21.76%, the worst single month decline since January 1987. The second worst October was 2008 at -16.94%.)
Why does the market hate October?! (or is it the other way around?)
Some of the worst days in the stock market actually happened in September: the 9/11 attacks and 2008 financial meltdown, for example. More often than not October has been a transition month, representing a buying opportunity for long-term investors able to endure some turbulence in exchange for future profits.
But more on that later…
Here’s the question for this past October: If the economic data was strong, why was the stock market so bad?
- Wage growth came in at $27.30 up from $26.47 in October 2017, an annual growth rate of 3.1%, the highest in 9 years
- Unemployment is hovering at 3.7%
- Inflation remains low, falling from a recent high of 2.8% in July to 2.3% in September
What’s not to like?
Market commentators have plenty of possible answers for why global stock markets dropped off a cliff in October: escalating talk of trade wars, possibility that central banks will increase interest rates too high and stall the global economic recovery, uncertainty about the outcome of the U.S. midterm elections, high stock valuations, political disruptions in Europe, and others.
While all these are legitimate concerns, none of them were new to October. Why did investors react so strongly?
To better understand the U.S. market landscape, let’s take a minute to review where we’ve been so we have more perspective on where we might be going.
- Strong U.S. economy and improving economies worldwide
- Tax cuts and strong corporate profits
- Low interest rates
- Global trade wars and a slowing Chinese economy
- Democratic House of Representatives may push back business-friendly legislation
- Ballooning government debt
So yes, there are things to worry about, but on balance, the worries don’t seem to warrant the precipitous drop in stock prices. Our best guess why October was so painful? The cause most likely lies with investor behavior, not fundamentals…
No matter what the reason for October’s fall, what really matters are the decisions we make now that the market has stabilized. Is it time to sell before the next shoe falls? Or buy and ride the rebound…assuming there is a rebound?
Each investor has to decide for themselves how much risk they can handle in pursuit of returns, but at Warren Street Wealth we’re holding on tight and buying into the weakness.
As outlined in a recent article in the Wall Street Journal¹:
- U.S. equities are trading at the lowest P/E ratio of the year and corporate earnings are solid
- S&P 500 is trading at 16 times forward earnings, near the long-term average
- Risk premium is 4.6%, indicating 1.4% higher expected returns than the long-term average
- Given the strong economy, the equity risk/reward tradeoff is fair
- International markets look cheap relative to the U.S.
- Despite current political challenges, economic foundations are stable and growing across much of the globe
- European stocks are trading at 12 times forward earnings, significantly lower than the long-term average of 16 times
- Emerging Market equities are trading at 11 times future earnings, compared to the long-term average of 13 times
All that being said, nobody likes to see negative numbers, investment professionals least of all.
As one of our clients told me the other day, “No matter the explanation, down is bad. The only thing that helps is up.” Our job at Warren Street Wealth Advisors is to honestly evaluate our investment decisions, make course corrections when needed, and hold the line otherwise. It’s been a rough market in the U.S. and even worse internationally, but the value is clearly there. We’re staying the course and watching for opportunities to buy into markets that have been beaten down unnecessarily. We don’t know how long it will take for these cheaper sectors to recover, but we want to be there when it happens. We hope you’ll be there with us.
Referring to the average monthly returns in the table, if you invested $1,000 in the S&P 500 when the market opened in January and earned the average monthly return compounded monthly, you would end the year with $1,090 or a 9% return.
Formula: $1,000 * (1 + .83%) * (1 + .38%) * … * (1 + 1.86%)
If you had an additional $1,000 to invest and knew what the future monthly returns would be, when should you buy more stocks to maximize your dollar-weighted return?
Rule of thumb: Buy low, Sell high
A. March and April B. May and July C. August and September D. December
Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss.