October chill

October chill.  Stocks dropped yesterday as recession fears gripped traders.  Tuesday’s weak manufacturing number combined with an unexpectedly weak employment number spooked investors.

 

MY TWO CENTS

 

1.  Halloween’s early arrival.  October has always been an interesting month for the stock market.  It marks the beginning of the 4th quarter – that final push to the end of the year.  September is typically a volatile month for the stock market, and while it may have felt like it lived up to its historical reputation, this past month was relatively calm.  The fourth quarter for stocks is historically the best quarter and October makes it into the top 3 best months.  On the contrary, some of the most notable stock market crashes occurred in October.  Think 1929, 1987, and 2008… Those years are now infamous for many younger investors in the Netflix generation.  Some of us actually lived through at least two of them and survived to tell the story (see below).  We are only 2 trading days into October and the S&P500 has already given up -3.02%!  While the overall economy continues to chug along, there are enough signs of fatigue that warrant investor vigilance.  Yesterday’s selloff began a day earlier with the weak manufacturing PMI and was made worse with the morning ADP employment report.  The report is always watched and is usually not a market mover, but yesterday it mattered in the wake of the previous day’s eye-opener.  ADP reported that 135k new jobs were created in September, which was less than expected.  Additionally the new hires represented a slowdown from the prior month which was also significantly revised down to 157k from the originally reported 195k.  The VIX volatility index is used as a gauge of fear in the stock market and it jumped yesterday closing over 20.  The VIX is actually a derivative that factors in implied volatilities from S&P500 futures options.  A higher number means that investors are paying more for out of the money options because they believe that the S&P500 will be more volatile in the future, thus more likely to be in the money.  Ok, ok, does that really mean anything?  No, the VIX is typically spiky, and is a good gauge of short term… very short term, sentiment.  A better gauge is bonds.  When stock investors panic, they typically move their capital into bonds causing them to spike.  Yesterday, the aggregate bond market only rose by +0.16%, which can hardly be considered a spike.  We have 28 more days before we close the book for October, pacing might be a good strategy.

 

2.  Take stock, ladies and gentlemen.  The past two days of trading have even the most experienced investors pushing up their spectacles and looking closely.  Yes, indeed it was a rough couple of sessions coupled with a less-than-rosy drama playing out in Washington DC.  It is at these times that I like to remind investors to freshen their focus on their goals.  I often refer to a Charles Schwab study in which they examined the S&P500 going back to 1926 and looked at return ranges of different holding periods. For three year holding periods the biggest gain would have been +31.1%, while the biggest loss would have been -27%.  That means that downside risk was almost equal to the upside potential.  The good news is that those numbers improve for longer holding periods.  If you held stocks for 10-year periods the upside was +20.1%, and the downside was only -1.4%!  That is a far better scenario.  If you held stocks for 20-year periods the biggest gain would have been +17.9% and the worst case was gain (yes a GAIN) of only +3.1%.  The message here is that if you are a long term investor with a solid, carefully monitored, diversified portfolio you should not panic, but rather stay focused.  Long term focus pays off.

 

THE MARKETS

 

Stocks sold off yesterday as recession fears gripped investors for a second session in a row.  The S&P500 fell by -1.79%, the Dow Jones Industrial Average dropped by by -1.86%, the Russell 2000 sold off by -0.92%, and the NASDAQ Composite Index slipped by -1.56%.  Bonds traded up and the 10-year treasury yields slipped by -4 basis points to 1.59%.  Energy was the worst performing sector for a second straight session as crude oil continues to slip on fears of weaker demand resulting from the slowing global economy.

 

WHAT’S NXT

 

– The even more critical but less quoted services PMI’s will be released this morning.  Markit US Services PMI is expected to come in at 50.9 even with last month.  The ISM Non-Manufacturing Index is expected to be 55.0 versus last month’s 56.4.

–  Factory Orders are expected to have fallen by -0.2% after climbing by +1.4% in the prior month.

– Fed members Evans, Quarles, Mester, Kaplan, and Clarida will all speak throughout the day.  Ex Fed Chair Ben Bernanke will also speak today.

– Pepsi beat expectations by +3.7% this morning and we will hear from Constellation Brands before the opening bell.  After the close we will hear from Costco.

 

DROP BY – SAY HI

 

I will be in our Boca Raton and Miami offices for the rest of the week and I would love to meet you.  Please reach out to set up an appointment.

daily chartbook 2019-10-03