Weekly Market Commentary October 15, 2018

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After months without a 1% move in either direction, the S&P 500 experienced three on consecutive days to end the week. Unfortunately, the large moves down on Wednesday and Thursday dwarfed Friday’s rally. For the week, the S&P 500 dropped 4.1%. Global stocks held up a tiny bit better as the MSCI ACWI sank 3.9%. Bad news in stocks supported bond prices and the Bloomberg BarCap Aggregate Bond Index rose 0.4%.


Key Points for the Week

  • U.S. stocks declined sharply last week, with the S&P 500 dropping more than 4%.
  • Concerns about interest rates, economic growth, and trade pressured markets.
  • Quarterly earnings will likely influence markets the most in the next few weeks.

As the accompanying chart shows, the decline was broad-based. All 11 sectors in the S&P 500 declined, and only one is higher for the quarter. Many popular stocks started selling off the previous week, and they remained the focus of sellers through the middle of the week. The decline then broadened to include additional sectors.


Market Commentary

The decline seems to have been precipitated by a host of concerns becoming slightly more worrisome at the same time. The individual effect of each would likely have been small, but the combination seemed enough to transition some investors to reexamine the risk of their positions and sell. Below are some of the top concerns investors seem to be reevaluating.

  • Interest rates will continue to rise, pushing bond yields high enough that bonds may offer a reasonable alternative to stocks and slowing economic growth in coming quarters.
  • Some technology and communication services stocks have become overvalued and investors looked to lower their risk to these sectors.
  • Trade friction between the U.S. and China continued to deteriorate, and the risk of an all-out trade war with this key trading partner and manufacturing hub finally hit the market.

Readers of this update will rightly point out each of these risks has been hanging over markets for a while. This is true, but whether it was the turning of the calendar or the recent increase in long-term bond yields, a sufficient number of investors reevaluated their risk and moved markets lower.


Investor Behavior

Last week’s sell-off caught the attention of many investors who had grown used to the third quarter’s steady climb higher. Sharp moves lower have a way of focusing investor attention on the market’s potential downside while obscuring its strengths.  Below are three points to keep in mind when making investment decisions in volatile times.

  1. Sharp market moves are part of investing. Investors get paid to bear risk, and last week is an example of what long-term investors should expect. Our view is the eerie calm of the third quarter was far stranger than the sharp moves of last week.
  2. Sharp declines tend to come in clusters. Investors should prepare for sharp moves higher and lower in coming months.
  3. Investors often add to the volatility in markets. Sharp declines can transition investors from optimistic to pessimistic very rapidly. The selling pressure in the late afternoons offers evidence of investors selling positions after the market has already declined.

Good Read

This week brought to mind Malcolm Gladwell’s “The Tipping Point: How Little Things Can Make a Big Difference.” The book illustrates how small adjustments in behavior by a few people can lead to the birth of major trends. This week’s market action seemed similar in that the fundamentals were hardly changed from two weeks earlier. Yet, the results were far different. Gladwell is a great writer, and his emphasis on social trends is fascinating.


 

 

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