Uncategorized, Weekly Update

Was This Historic October Selloff the Beginning of a Bear Market?

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Published November 2, 2018


October is one of the two best months of the year here in Austin, Texas (the other being April). “Best” being defined as a break from the sweltering heat that drags along from May through September. In April and October, skies are sunny, temperatures are moderate, and our city is a joy. However, this year, we have experienced unprecedented rainfall that has washed away much of our prized October. The result of all the rain has been a swollen, mud-filled river through our city that has overwhelmed our water treatment facilities causing us to spend a week boiling water if we wanted to use it. It’s been a dramatic unraveling of our normally blissful month.

The stock market has experienced its own October unraveling. After a period of immense calm, stock investors have been rocked by a crushing series of volatile trading days, most often leaving market indexes heavily in the red. The sharp selloff ranks among the top 10 most damaging 35-day periods in the past 65 years.

Top 10 S&P 500 drawdowns since 1953

The good news from the chart above is that these 35-day periods are often just brief, painful blips in an otherwise bullish period. Only once since 1953 has one of these one month plunges gone on to be part of a larger bear market.

Stock markets rally when investors take hold of a positive narrative, such as 2017’s synchronized global economic boom theme (which this year proved false). Now, we are barraged by negative investment themes – e.g. peak earnings, rising interest rates, trade fight with China, …. This is a fascinating time in the stock market. We have what we might call anecdotal data above that seems favorable for stocks. We also have a perfect post-election record of gains dating back decades. The past 17 midterm elections have kicked off annual gains for stocks every single time, with an average gain of a strong +17%. And coming up on the best time of the year, seasonally, to own stocks. But the technical damage from this stormy October, and especially among the market’s leadership, has been immense. We are very far into this bullish cycle. Will the bulls be able to find new reasons to push the market back to new high ground? If so, what will those reasons be?

It is during these turbulent market times that strategies such as ours more than pay for themselves. For example, even at the worst of the selling as index after index was giving up their gains for the year, our FP Research Multi-Asset model portfolio held on to its gains for 2018. Our models here are ‘on the case’ every day to discern the changing market landscape, protecting your wealth from serious market damage and leading the way to long-term profits in good markets and bad.

Market Update

Stock investors hoped for relief this week after a bruising four week period that has seen indexes suffer one of the worst monthly periods in a decade. Monday started strong with indexes rising as much as +2% before rolling over and giving up all those gains and then some. There was no single catalyst for the selling with some pointing to further trade tariff rhetoric from the White House. However, it was just another day of investors selling the market leading FANG stocks which undermined the rally effort. Stocks added -0.7% to their hefty October losses. However, Tuesday finally brought an oversold pop with stocks rising +1.6%. That positive effort was followed by a +1.1% rise Wednesday as Facebook (FB) offered a solid earnings report to calm tech/consumer investor concerns. Interest rates nudged higher for a second day which helped financial stocks. News of positive talks between China and the U.S. on trade further emboldened the bulls Thursday as stocks opened November with a third straight gain. Another +1.1% rise came as global chemical heavy hitter DowDuPont (DWDP) reported strong results. The three day bounce brought the S&P 500 to its first 200-day moving average visit since breaking through that major trendline the prior week. Friday brought the market lots of news with Apple’s report overnight beating estimates but sending the stock notably lower as the company announced they will not be issuing unit sales data going forward. The monthly jobs report showed a heavier increase than expected pushing interest rates up further on expectations that wage growth will drive higher inflation. Good earnings from energy giants Exxon (XOM) and Chevron (CVX) supported that sector. Stocks ended the day lower by -0.6% having found resistance at the 200-day moving average for now.

Stocks recovered a portion of recent losses with the S&P 500 (SPY) rising +2.47% while the Nasdaq 100 (QQQ) rebounded +1.63%. The small-cap Russell 2000 (IWM) showed unusual leadership on the bounce with a +4.42% weekly gain.

Warm wishes and until next week.