According to Mark Twain, October is the most dangerous month for stocks. Right he was.
Things turned ugly last week following hawkish comments from Lou Jiwei, China's finance minister, a negative reaction to the U.S. Treasury's moves to stop "tax inversion" mergers, escalating riots in Hong Kong, and weak data from Europe and Asia.
Equity volatility is simply the latest permutation of selling that's hit most asset classes in successive fashion. It began with commodities, which have been slammed by the strength of the U.S. dollar (up 7% at the end of the quarter). It spread to emerging markets and European stocks.
Recently, it's crushed high-yield corporate bonds, which suffered their worst weekly decline since June 2013.
Small caps, represented by the Russell 2000 index, entered bear market territory. Having fallen 20 percent from their May highs. Now the Nasdaq has joined its small-cap brethren. And while this slow and silent bearish creep is worrisome, it's still reversible.
A select cadre of large cap Dow stocks have been stars. Even as a select group of Dow components have careened through their 200-day moving averages. Winners have been health care, transportation and technology. God forbid you're overweight commodities, emerging markets, the eurozone or small caps. Even mid caps, perennial overachievers they are, have looked shaky.
So, why the drift lower?
Investors are anxious over the Fed's termination of its bond-buying efforts. After billions in bond purchases, which bolstered stocks by encouraging debt-funded corporate stock buybacks, investors don't want the party to end. Further, investors saw stocks suffer at the end of QE1 and QE2. Not to mention that the end of bond buybacks will be followed, eventually, by the Fed's first interest rate hike since 2006.
Add in the current weakness overseas in China and Europe (both down eight percent from their highs) and the recent decimation of commodities (thanks to a strengthening dollar), and you begin to understand why investors feel like there's nowhere to hide.
As of today, the S&P 500 is four percent below its highs. But, the entire U.S. stock market, as measured by Vanguard's VTI, is five percent down. Hardly a route. Yet, enough to have investors feeling the heat.
Remember, September and October have historically represented the most bearish time of the year. The good news? November and December tend to be the most bullish. And the news gets better. Bespoke Investment Group looked at years in which Q4 has a mid-term election and revealed that the results have been excellent. Since 1928, the average Q4 gain in years with mid-terms has been 6.47 percent. And in years that included a lame-duck president, of which there are four sample sets, Q4 performance inflates to 10.50 percent. In other words, we are about to enter a statistical sweet spot.
The market is down. Volatility is up. And we're entering what has historically been a great time for investors. Hold onto your hat, cowboy. It's rough riding at the moment. But history calls for better times ahead.
Major markets finished lower last week. The DJIA fell 0.60%, the S&P 500 dropped 0.75%, and the Nasdaq declined 0.81%. Small cap stocks declined 1.23%. And the 10-year Treasury bond yield fell 9 basis points to 2.44%. Gold fell $26.62 per ounce, or -2.18%.