Issue #65 - Another Scary October

February 2009, May 2010, August 2011, January 2016 – these are all months in which the S&P500 lost as much ground as it did in October 2018.  All of these months were quickly forgotten as side-notes to the longest-running bull-market in history.  So why are investors so shaken from the recent stock market movements?  In this month’s Innova Market Insights, we discuss the recent shake-up on the world markets and some of the contributing factors to this year’s abysmal stock market performance.

It is important to note that although the focus has been on the terrible month of October for US tech investors, as of November 2^nd most of the world markets are in the red.

As you can see, it hasn’t been pretty…  Some of the main reasons for these difficult investment times are as follows:

Late-Cycle Economy

Like all living organisms, the economic cycle has a beginning, middle, and end.  We have recently experienced one of the longest running growth cycles in modern economic history and there is a growing body of evidence that suggests that we are in the later stages of this cycle.  That being said, it has also been one of the slowest recoveries while inflation and wage growth are still below historical averages.  Any signs that these two indicators are beginning to creep up typically signal that the end of the growth cycle is nigh, and along with it, investor optimism.  The stock market is a forward looking indicator that represents the economic expectations of the coming 12 to 18 months.  When cracks start to appear in the foundation, such as inflation, markets will react quickly and viciously, as we have seen this year.

Interest rates

All things being equal, when given the option of choosing between two investments with the same return potential, a logical investor will always choose the lowest risk option.  When interest rates rise, the returns of relatively risk-free assets like government bonds increase and in-turn put pressure on all other forms of investments to compete for investment dollars.  In other words, the higher risk investments are no longer as attractive and so investors reallocate their capital.

Furthermore, rising interest rates acts as a drag on the overall economy.  If more of your dollars are going towards interest, there is less available to chase new goods or services.  The same can be said for large multi-nationals and thus economic activity slows. 

Irrational exuberance

After almost ten straight years of rising markets, investors have grown complacent.  The most popular investment in the world is known as a market-cap weighted exchange traded fund (ETF).  In large part, these positions charge little to no fees to buy more investments that have already increased in value.  The only attribute to consider when deciding how much of a company to buy is its size.  With no research into the viability of a company or consideration of the purchase price, this runaway ETF train had simply gone too far.

Scary time of year

Another reason for the exacerbated losses might be the actual month they occurred in.  Investors are scarred by the fact that some of the biggest drops in the history of the stock market (1929, 1987, and 2008) all occurred in October.  So when the markets start to slip in October, there is a Pavlov’s dog response to duck and cover.

How does this affect you?

Our overall portfolio strategy revolves around Tactical Asset Allocation.  This strategy focuses on smoothing out the bumpy stock market ride for investors so they can reach their investment goals by reducing risk when markets appear to be high, and increase risk when they appear to be low.  For many of you, we have been recommending lower risk levels and higher cash positions in the face of these uncertain markets.  This strategy has proven to be quite beneficial in protecting your investments.

We spoke with many of our clients in the past two weeks to rebalance portfolios and buy into this dip.  If you’d like to discuss investment options further, please do not hesitate to contact us.

Related
Investopedia:  October Effect