What’s on Tap: Navigating Stock Market Turbulence

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  • What’s Pushing Stock Markets Lower?

  • Stock Market Declines Are Normal

  • Looking Ahead: Earnings and Other Economic Indicators

As Hurricane Michael ravaged the Florida panhandle and the Southeast, so did a surge of selling hit Wall Street this past week. At Thursday’s close, two days of declines had left the Dow Jones Industrial Average 6.6% below its record high set just six trading days prior. The selloff provides a dramatic reminder that sometimes it is just momentum—positive or negative—that moves markets on any given day. 

With the bulk of third-quarter earnings reports set to roll out over the next two weeks, we would not be surprised to see more sporadic bouts of selling (or buying) fill the information vacuum until a trend establishes itself.

For the year through Thursday, the Dow Jones Industrial Average has returned 3.1%, while the broader S&P 500 has gained 3.6%. Foreign stocks remain the underperformers for the year with the MSCI EAFE index, a measure of developed international stock markets, down 7.5%. Bonds have also been under pressure. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.53% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.0% for the year.

What’s Pushing Stock Markets Lower?

It’s the question everyone on Wall Street is asking: What’s pushing stock markets lower right now? While pet theories are a dime a dozen, there’s no single news event that has driven the selling. It could be worries about a trade war with China, or China’s own slowing economy. It could be rising interest rates, or President Trump’s criticism of Federal Reserve policymaking. Maybe it’s the fact that while the rate of earnings growth could be close to 20% for the third straight quarter in Q3, that pace of growth is unsustainable and is virtually guaranteed to slow. 

We take to heart the insights of Elroy Dimson, a market historian and professor of finance, who notably said, “Risk means more things can happen than will happen.”

So what’s our answer to the question of why markets tumbled the last two days? Simple: There were more motivated sellers in the market than there were buyers. To be clear, we’re talking traders, not investors. Traders buy and sell on all manner of rumor and emotion—investors invest.

Our tactical investment strategies follow a disciplined approach that removes emotion from the equation, and are designed to navigate short-term volatility on the path to long-term gains. We believe they provide value during periods of market turbulence like this.

Stock Market Declines Are Normal

Wednesday’s 832-point decline for the Dow may have sounded big, relatively speaking, but on a percentage basis, it was a 3.2% pullback. Had we seen an identical point-drop five years ago, with the Dow at 15126, it would have been a 5.5% fall. A decade ago, just weeks after Lehman Brothers collapsed, 832 points would have represented a 9.8% loss—essentially a one-day correction—making it the fourth-worst day for the Dow in the last 100 years. 

But Wednesday’s decline wasn’t anywhere near that; the 3.2% fall may have been fairly large—the 258th biggest drop out of more than 12,500 days that ended up in the red in the last century—but it was hardly a bull-killer. Nor was the 2.4% dip we saw yesterday. 

With the Dow trading 6.6% off its October 3 high-water mark and the S&P 500 down 6.9% from its own peak as markets opened on Friday, investors may have been holding their collective breath. But we weren’t. Analysis by the Adviser Investments research team shows that in any given calendar year, the stock market, at some point, drops an average 14% from a recent high. Yet we don’t have 14% losses year after year. Markets go up…and they go down…and they go up again. We have yet to see a decline of even average magnitude in 2018 and may not before year-end. A 6.9% drop is hardly worrisome.

Note: Chart covers calendar years from 1980 through 2017 and is based on S&P 500 Index returns.  Sources: Bloomberg, Morningstar.

Note: Chart covers calendar years from 1980 through 2017 and is based on S&P 500 Index returns.

Sources: Bloomberg, Morningstar.

Looking Ahead: Earnings and Other Economic Indicators

After hearing from a few bellwether banking companies this week, next week we begin to get the real flow of third-quarter earnings reports, including from Bank of America, Charles Schwab, CSX, Goldman Sachs, IBM, J.B. Hunt, Johnson & Johnson, Netflix, Abbott Labs, Alcoa, Cohen & Steers, Morgan Stanley, U.S. Bancorp, Bank of New York Mellon, BBT, E*Trade, Honeywell, Procter & Gamble and Schlumberger, among others.

We’ll also get reads on retail sales, home building, job openings, existing home sales, leading economic indicators and the minutes from last month’s Federal Reserve meeting. 

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, October 12, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

© 2018 Braver Capital Management, an Adviser Investments, LLC company. All Rights Reserved.