Halloween came early to Wall Street, bringing with it unsettling and sometimes scary moves. It took just a few trading days to erase the long road to new highs that were reached just a few weeks ago. Living up to its reputation as one of the most volatile months of the year, traders didn’t have to look far to find reasons to sell stocks this past month. With a deluge of earnings reports, the first read on third quarter GDP, minutes of the last Federal Reserve meeting, increased tensions with China, anticipation of the midterm elections, the movement of thousands of migrants toward the US border through Mexico, and the death of a journalist in Saudi Arabia, there was an abundance of tricks without any treats. Investors were whipsawed from one headline to the next and markets revealed the nervousness in some of the most volatile trading we have witnessed in a decade. It took until the last trading day of the month to have two consecutive positive days. The late two-day rally was not enough to bring the Nasdaq back from the relentless selling earlier in the month, causing the tech heavy index to suffer its worst month since 2008. By the closing bell on the last day of trading for the month, the Dow had fallen 5.07%, the S&P 500 shed 6.94% and the Nasdaq lost a total of 9.87% for the month. Volatility was not just limited to stocks, interest rates reacted to the combination of earnings and economic data along with comments from the Federal Reserve.
If we focus on the economic data, most signs point to an economy that is still doing quite well. With approximately two thirds of the S&P 500 companies having already reported, I would sum up the results so far as solid. Of the 313 companies that we have already heard from, 83% have beat their earnings estimate while only 60% beat their sales estimate. Earnings growth is a strong 23% and sales growth is up 8%. Unfortunately, last quarter had 26% earnings growth and 11% sales growth. Therefore, although we are still seeing what would be considered strong numbers, investors view it as decelerating growth, which has been one of the triggers for volatility. For many, traders just seem to be saying, “that’s good, but just not good enough.” For long term investors, it is frustrating to endure the day to day volatility that many times seems unwarranted.
GDP and the employment numbers would also qualify to “check the box” as solid. The economy grew at 3.5% for the third quarter, slightly better than the 3.4% forecast by economists. Consumer spending, which accounts for more than two thirds of U.S. economic activity, grew by 4% in the third quarter, the strongest since the forth quarter of 2014. Unfortunately, business spending declined by 7.9%, the largest quarterly decline since the first quarter of 2016. The jobs data came with the same conflicting news that allowed for interpretation. The economy added just 134,000 jobs in the month of September, falling well below the estimates of 185,000. The positive came in the revisions, with July and August’s number being revised up dramatically from 201,000 to 270,000 and from 147,000 to 165,000. The bulls would walk away with the part of the report referencing the unemployment rate at the lowest level in nearly 50 years. Bears would point to the fact that September created the fewest number of jobs in a year. These broad economic indicators showed mixed signals, leaving the data up to interpretation and spelled the perfect environment for volatility. The release of the jobs report in early October did send ten-year treasury rates to the highest levels in 7 years, igniting fear in the stock market that could be referenced as the initial trigger for the selling.
With the midterm elections squarely on the front burner, both parties struggled to maintain focus with new headlines from around the world all month. Early in the month, attention focused on the caravan of migrant workers from Central America, making their way to the U.S. border through Mexico. As the numbers swelled and the administration readied assistance for border patrol, new political tensions arose, not only within and between party lines but across our borders as well. It was not long until attention turned to the news of the death of Jamil Khashoggi and the subsequent deterioration of the economic summit that took place at the end of the month in Saudi Arabia. The event, deemed the “Davos of the Desert,” was intended as an unveiling of the vision of the current prince to modernize and bring Saudi Arabia into the fold as a global economic partner. One by one, business executives and economic leaders around the world cancelled their attendance at the event, sending a message and potentially putting a strain on their relationship with Saudi Arabia.
In addition to all of this, many had been optimistic that tensions with China, if not resolved, would be moving toward a resolution by the end of the month. In late October, Bloomberg reported that Washington was preparing to announce more tariffs on Chinese imports in December. Currently the U.S. has imposed tariffs on $250 billion of Chinese imports and the Chinese have responded with tariffs on $110 billion of U.S. goods sold to China. Although President Trump is still looking to make a great deal with China, he stated, “I have $267 billion waiting to go if we can’t make a deal.” Uncertainty surrounding future costs due to tariffs was a common concern of companies reporting earnings this quarter, leading to one reason for the anticipation of possibly softer numbers going forward. This could be another cause of the volatility surrounding earnings, triggering additional rounds of selling even considering solid numbers for the third quarter.
With all the headlines surrounding the state of the economy and the global political environment, it helps explain why this October has been one of the most volatile in more than a decade. There were 9 days of the month that stocks moved in either direction by more than one percent. From the period of June through September, there was not one day of a one percent swing or greater. Add this to the intraday volatility and it was enough to spook even the most seasoned investors. Heading into the end of the month, on Monday the 29th, the markets opened higher and the early hours of trading were up more than 350 points. By midday, the gains slowly slipped away and very quickly turned to losses. At the bottom, the market was down over 500 points for an intraday swing of about 900 points. Months like this past month remind us just how unsettling investing can be over short periods of time. This volatility is more normal than the lack of it that we experienced during 2017. Since 1950, markets have had, on average, 50 days that the major indices moved by more than one percent in either direction. So far for the year, we would be on track for average given we have had 45 so far. This also reminds us that averages can be misleading. When you get nearly 20% of the annual average in just 4 weeks, it doesn’t feel anything like average! The good news is volatility tends to shake confidence. Investor optimism, which we often read as a contrarian indicator, has dropped out of the excessive optimism zone according to New Davis Research Crowd Sentiment Poll. It may be important to note that since 1952, the three-month period beginning in November has been the best three months of the year, every year.
For many of us that follow the news every day and try to make sense of the world we live in, I will close on a quote from the New York Times from October 17. For a non-financial perspective of just how much things are changing I leave you with this: “Canada on Wednesday became the first major world economy to legalize recreational marijuana, beginning a national experiment that will alter the country’s social, cultural and economic fabric, and present the nation with its biggest public policy challenge in decades.” As the U.S. continues to approve legalization of marijuana at the state level, we can watch our neighbors to the North as they forge the way on this highly controversial issue. The claim is that the potential tax revenue will outweigh the downside risks. It turns the debate into an economic issue that we will therefore need to pay attention to.