Come Thou Long Expected Correction


October proved to be one of the wildest months for the stock market in recent memory.

At one point intraday on October 15th, the S&P 500 had declined about 9.9% from it’s all-time high — we’ll call this “close enough” to the 10% territory that defines a true stock market “correction,” which is something many market observers felt was well overdue. Fortunately, though, October has 31 days — not 15 — and by the time Halloween came, the tricky start to October had given way to quite a treat — a rally that left the Dow at a new all-time high and the S&P 500 just a fraction below its all-time high.

So what were the reasons for this heightened volatility?

On the negative side, the market was dealing with:

1. Weakness in Europe and Asia, most notably German industrial production;

2. Steep declines in the price of oil, which many market participants interpreted as a sign of major economic weakness and led to concerns that lower oil prices would threaten the narratives about American energy independence and the American manufacturing renaissance;

3. Ebola concerns that, in our opinion, cast a very large pall over the market, allowing other concerns to become more magnified. For example, on October 13, the markets were relatively flat in the early afternoon until a plane landed in Boston with five sick passengers. Although it turned out that none of the passengers had Ebola, the market quickly dropped 1.5% when the news hit the wire about the sick passengers.

In the middle of the month, a few things happened that turned the markets around quickly.

First, the Ebola scare largely subsided. A few patients were quarantined in the U.S., but those who have contracted the virus are now recovering. And many of the fears about Ebola outbreak have been calmed by greater education about how the virus is (and is not) spread. With this panic out of the way, it allowed investors to focus on such things as:

1. Generally improving employment data, such as a strong non-farm payrolls number from earlier in the month and the lowest level of new unemployment claims in 14 years;

2. Good industrial production figures and a strong Philadelphia Fed survey reading;

3. Strong earnings from blue chip companies in the U.S.;

4. A better than expected GDP reading of 3.5% (vs. the expectation of 3.0%).

All in all, it was a whirlwind of a month, but the market seems to be back on firmer footing right now. Although the level of volatility seen in October is rather rare, pullbacks in the stock market are not. Per LPL Financial Research, markets typically see four pullbacks of 5% or more in a year.

For the rest of the year, markets are likely to focus on the results of today’s mid-term elections and will continue to anticipate further Fed policy heading into 2015. Although oil continues to hover near recent lows, we regard this as much more of a positive than a negative. There are certainly concerns about global growth, but lower oil means lower gas prices, and that means more money in the hands of the consumer — as we have written about numerous times before.

Thank you for reading, and we hope that everyone will go out and vote today!

Carl Beck

November 4, 2014

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