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    • 2021 News Articles >
      • What is it about September?
      • Will Tax Law Changes Increase Your Taxes?
      • Tax Watch: SECURE Act 2.0?
      • The unstoppable bull market?
      • Stocks Cruise at a High Altitude
      • Tax law changes on the horizon – 5 things to consider
      • Not Your Fathers Economic Recovery
      • Are HSAs the New IRAs?
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
      • Avoiding 7 Retirement Traps
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • News - Archives >
      • 2015 - To be happy, be grateful. - It's science!!
      • 2015 - Market Volatility - So Now What?
      • 2015 - Retirement planning: Start early or start late – just start
      • 2015 - Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • 2015 - A sneak peek at 2015 – What to keep an eye on
      • 2015 - Getting The Most Out of Financial Aid for College
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves

November 2018 Market Update - Why is October So Scary?

What is it about the month of October? The stock market crash of 1929 ushered in the Great Depression. Black Monday 1987, also October, was driven by computer trading and portfolio insurance, though an economic calamity did not ensue.  During October 2008, the S&P 500 Index lost nearly 17%, the biggest monthly decline of the financial crisis (St. Louis Federal Reserve).  There is the lesser-known Panic of 1907, which shaved 15% off the Dow Jones Industrials during…yes, October (St. Louis Federal Reserve).
 
Despite its ghoulish reputation, if we look back as far as 1970, the broad-based index of 500 major U.S. stocks has averaged a gain in October. October ranks number three in performance when using the median return.  In case you’re wondering, September is the weakest month, on average.  Between 2009 and 2017, we’ve experienced three declines in October, each losing just under 2%. In the six periods that saw an advance, the S&P 500 averaged a 5.3% advance–impressive.  This year was different. The Dow lost 5.1%, and the S&P 500 Index gave up 6.9% (WSJ).
 
Why?  -There isn’t a specific catalyst. When investors place sell orders, there isn’t a “reason to sell” on the ticket. But, we can reflect on the various themes that cast a shadow on shares.
 
1. Interest rates and a policy mistake October started on a soft footing after Fed Chief Jerome Powell said the fed funds rate is “…a long way from neutral at this point (where rates neither stimulate nor restrict growth), probably” (Q&A with Judy Woodruff PBS anchor).  It’s a curious remark. The Fed has hiked rates eight times in almost three years and stocks performed admirably, because the rate increases were in response to a firmer economy. Besides, we are only three rate hikes away from neutral using the Fed’s own estimate.
 
Still, his remark suggested a more aggressive posture might be brewing inside the Fed. He has not clarified.  The fear? Raise rates too quickly and the Fed risks throwing the economy into a recession. It would amount to a policy mistake.  Raise rates too slowly, and there is a risk of overheating. You know, an economic boom ensues that may lead to inflation and eventually a bust.  The Fed’s gradual approach is designed to thread the needle. While the direction of rates may matter, the level remains low.
 
2. Slowing global growth and trade tensions
 China is slowing down and growth in Europe has softened. For firms doing a significant share of business overseas, the profit outlook has dimmed.  But, as investors look ahead to 2019, they are once again fretting about the impact of U.S. trade policy on earnings. Q3 profits have been quite strong–up 26.2% through November 1 (Refinitiv, formerly Thomson Reuters, 70% of S&P 500 firms reported). Yet, commentary regarding tariffs injected a cautious tone into sentiment. It’s especially acute for industrials that rely on China’s market.  Simply put, concerns bubbled to the surface that benefits from deregulation and the tax cuts might be offset by a trade war.
 
3. The so-called October effect
 Let’s revisit the initial question–what is it about the month of October?  On September 21, Jason Zweig wrote in the Wall Street Journal, “Investors’ fear of September and October is based less on evidence and more on what psychologists call ‘availability’—the human tendency to judge how likely an event is by how easily we can recall vivid examples of it.”
 
In other words, dramatic sell-offs are seared into our memories. But, we don’t recall the S&P 500’s eight percent advance in October 2015.  Zweig adds, “Average returns on U.S. Treasuries appear to be higher in fall than in spring, suggesting that investors seek safety in the darker months. Stock analysts’ earnings forecasts are less optimistic in fall and winter than in spring and summer.”  We receive even less sunlight in November and December! But the final two months of the year historically finishes strong, at least on average.
 
These may or may not be reasonable explanations for the so-called October effect. Such explanations aren’t rooted in the economic fundamentals but in the behavioral aspects of investors.  It’s why I repeatedly emphasize the importance of adhering to the investment plan. It is a long-term road-map that takes unexpected sell-offs into account. It places a barrier in front of an emotional response. 
Final tally and perspective
 
With all the angst we’ve seen in the financial press, the S&P 500 lost 9.9% from closing peak to trough (St. Louis Fed 9/20-10/29).  It’s not quite an official correction, which would be a loss of 10%.  While I understand the speed of the pullback may be disquieting, a sell-off of 5%-10% is modest by historical standards.  Since 1980, the average intra-year peak-to-trough dip has been 14% (LPL Research). Yet, stocks are much higher today than when Ronald Reagan became President. Why? Stocks have a long-term upward bias–average annual gain, including dividends, 12.6% since 1980.
 
We’ve experienced several sell-offs in recent years. Blame Brexit, the European debt crisis, China worries, the Ebola scare, the Japan earthquake/tsunami/nuclear disaster, U.S. debt downgrade, and much more.  When the risks that jolted short-term traders failed to materially alter the economic outlook, stocks recovered.
 
We’ve had growth scares before, and they occurred when activity was not as robust as today. Early 2016 comes to mind, when oil prices had collapsed, turmoil appeared in credit markets, and recession fears surfaced.  Today, credit markets are functioning normally, the outlook for the U.S. economy is favorable, and odds of a near-term recession remain low.
 
If you have any questions, thoughts or concerns, let’s talk.

 
John A Davidson, CFP®

Your comments and questions are always welcome.
We look forward to hearing from you.  mail@kyleshill.com


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- John Davidson, CFP
  • Home
  • Background
    • About Us
    • Q&A
    • Disclosures
    • Privacy Policy
  • Services
    • Planning Process
  • Clients
    • Business Owners
    • Individual Professionals, Families, Retirees
  • Contact Us
    • Newsletter Sign-Up
    • Useful Websites & Quick Hits
  • Account Access
  • News
    • 2021 News Articles >
      • What is it about September?
      • Will Tax Law Changes Increase Your Taxes?
      • Tax Watch: SECURE Act 2.0?
      • The unstoppable bull market?
      • Stocks Cruise at a High Altitude
      • Tax law changes on the horizon – 5 things to consider
      • Not Your Fathers Economic Recovery
      • Are HSAs the New IRAs?
      • REVENGE OF THE NERDS - Internet forums vs. the professionals
      • Protect Your Financial Information
      • 2021 January Market update - A rollercoaster year ends on a high note
      • Avoiding 7 Retirement Traps
    • 2020 News Articles >
      • December Client Letter - Cruising at 30,000 Feet
      • 9 Tax Facts & Tips to Save You Money
      • 9 Smart Planning Moves to Consider
      • November Client Letter - Election 2020
      • 7 Financial Planning Steps for Year End 2020
      • 6 Tips on Filing the FAFSA
      • Circling Back to the SECURE Act!
      • A September Pothole
      • 6 Steps That Put You on the Path to a Successful Retirement
      • Consumer Scams Part 2
      • September 2020 Client Letter
      • Consumer Scams
      • May Client Letter-- Worst-Ever Economy Yet Stocks Show Best Monthly Gain Since '87
      • Why Waiting For A Market Rebound Could Cost You
      • How The Greatest Generation Approached September 11th
      • Laid Off And Near Retirement - What Now?
      • The SECURE Act
      • Market update: When favorable fundamentals collide with uncertainty
    • News - Archives >
      • 2015 - To be happy, be grateful. - It's science!!
      • 2015 - Market Volatility - So Now What?
      • 2015 - Retirement planning: Start early or start late – just start
      • 2015 - Financial Planning Checklist
      • 2014 In Review - A bullish mood and risks that dot the landscape.
      • 2015 - A sneak peek at 2015 – What to keep an eye on
      • 2015 - Getting The Most Out of Financial Aid for College
      • 2014 - Cheaper by the Dozen: 12 smart year end planning moves
      • 2014 - How safe is your personal information?
      • 2014 - Hey, what’s your number?
      • 2014 - What did we do before GPS?
      • 2014 - Changing Jobs Checklist
      • 2013 - US Government Shutdown - What it means
      • 2013 - Investing in College
      • 2012 - Getting (back) on track - The best part of my job…
      • 2011 - The Henny Penny School of Investment Wisdom
      • 2011 - 8 Ways to Help Couples Overcome Money Conflicts
      • 2011 - Intelligent Computer Shopping
      • 2011 - 7 things you and your student should discuss before they head off to college
      • 2011 - 7 mistakes to avoid when exiting your business
      • 2011 - Why you need an Estate Plan even if you don’t live in a mansion
      • 2011 - Celebrating Irish Heritage
      • 2010 - Priorities: Retirement Planning Vs College Savings for Children
      • 2010 - in review, and a look toward 2011
      • 2010 - New Years Resolutions - 2011
      • 2010 - Business Owners – a special case for diversification
      • 2010 - Year End Planning 2010
      • 2010 - Paying for college - Applying for student aid, determining your Expected Family Contribution
      • 2010 - Paying Taxes
      • 2010 - Job-Loss
      • 2010 - Habits
      • 2009 - Shopping
      • 2009 - Gift-Idea
      • 2009 - Thanksgiving
      • 2009 - Q3
      • 2009 - Recovery
      • 2009 - Results
      • 2009 - Digging
      • 2009 - Time
      • 2009 - Considering
      • 2008 - Planning
      • 2008 - Resolutions
    • Life Transitions >
      • Get A Job/Leave Job >
        • 9 Questions to ask your CPA at tax time
        • Getting (back) on track - the best part of my job
        • Changing Jobs Checklist
        • Job Loss
        • Taxes - 7 ideas to ease the burden - 2018
        • Year End Planning Checklist: 12 smart planning moves to consider
      • Marriage/Divorce/Re-Married >
        • 8 Ways to Help Couples Overcome Cash Conflicts
      • Kids (Birth/College/Marriage) >
        • 7 Things you and your student should discuss before they head off the college
        • Getting The Most Out of Financial Aid For College
        • Investing In College
        • Budgeting For Students
        • Save on Textbooks
        • Subsidized vs unsubsidized loans – what’s the difference?
        • 7 Tips for Your College Bound Student
        • “What I did on my Summer Vacation – 2019”
        • Budgeting for College Students - 2018
        • Most Significant FAFSA Changes in over 20 Years!!
        • Direct 529 Plan Changes To Be Implemented
      • Birth/Death >
        • Is a cash windfall in your future?
        • Planning for People with Special Needs
    • Client Letters >
      • 2019 - July Client Letter: Records Are Made To Be Broken
      • 2018 - Summer's Hot Issues
      • 2018 - November Market Update:
      • 2016 - January Client Letter - A volatile year ends with a whimper
      • 2016 - September Letter to Clients: The Ides of September?
      • 2016 - November Letter to Clients: The Final Countdown?
      • 2016 - December Letter to Clients: Near Term Impact of Trump's Victory
      • 2015 - September Client-letter: Looking past scary headlines
      • 2015 - November Client Letter: The Clouds Part
      • 2015 - December Client Letter, A Baker's Dozen: 13 Smart Planning Moves