What Happened in the Stock Market Yesterday?
This article was originally published in October of 2018, following a particularly bad day in the stock market. We now update it on a regular basis to stay up to date, but you can find the historical information below.
Disclaimer: We believe that watching the day-to-day gyrations of the stock market is more likely to drive you mad than to help. Over the long run, the stock market is an incredible money-making machine, but it is not as obvious from one day to the next. If you'd like to talk to a financial advisor about your long-term investment strategy, drop us a line.
What happened in the stock market - December 2022
Santa may have come early for the stock market as the so-called “Santa Rally” never materialized in December. The S&P 500 fell 6.1% in the month, though that decline was not enough to offset what turned out to be the strongest quarter of the year. In fact, it was the only positive quarter of 2022 at a 7.0% gain.
A major reason for December’s decline was Fed Chairman Jerome Powell’s comments reinforcing that the Fed remained committed to aggressively combatting inflation. A growing number of voices on Wall Street, like Professor Jeremy Siegel, have been calling for the Fed to pause rate hikes, arguing that the Fed’s actions have already been enough to combat inflation and that the Fed risks pushing rates too far and harming the economy. Stock prices had been advancing on the idea that the Fed may pivot earlier than expected but Powell gave no indication that they will pivot in the short-term.
While stocks fell across the board, the prospects of higher interest rates weighed on Growth companies more heavily than Value companies.
This has been a trend we’ve seen all year as Value stocks substantially outperformed Growth stocks in 2022. The headwinds for Growth are multifaceted. Expectations for Growth companies grew far too lofty in the aftermath of the pandemic and pandemic darling stocks, like Zoom and Peloton, have come crashing back to Earth. From a technical standpoint, the purchase of a share of a stock is a claim on the present value of the stream of future earnings. The math that discounts the future earnings to today is heavily influenced by the discount rate. Low interest rates could support high valuations but the rapid increase in rates this year necessitates a rerating of these dearly priced companies.
Furthermore, Growth companies entered the year historically overvalued relative to Value companies and even with the strong move towards Value, they remain expensive. While valuations are not a great timing mechanism, eventually, regression to the mean is a powerful force. When you couple the context around these relative valuations with the trend in the market favoring Value companies, we believe there is still time to take advantage of the current Value phase and are tilting our portfolios towards Value.
It's been a tough year in financial markets as seemingly everything from stocks to bonds saw declines. What makes the year tougher is that the types of investments that had been doing the best over the past couple of years tended to do the most poorly during this bear market. We are offering a personal portfolio analysis to evaluate your investment portfolio and help you stay ahead of risks and opportunities. Contact us today to set up this complimentary analysis.
What happened in the stock market - November 2022
We often like to say there are two or three things worrying the stock market at any given time, but right now those things seem to be, in order:
Everything else seems to be a distraction.
If you recall back to the summer, the stock market set lows with the Russell 3000 posting a 24% loss for the year in June once it became clear the inflation picture was worsening. Then, from the start of July until the middle of August, the Russell 3000 rallied nearly 15% on the back of a better-than-expected inflation report showing that inflation was cooling.
That inflation report proved to be fool’s gold, however, as the next couple of inflation readings showed that inflationary pressures were not easing and the market revisited those 24% lows. The bottom line is the data that appears to be causing the most movement in the market is the inflation data.
So far this quarter, the inflation reports have trended positive again and the market is rallying by double digits as a result. In fact, we are in a strange cycle where good news can be bad news as highlighted by the November jobs report showing a robust and resilient labor market, which was met by a drop in the stock market. The concern was that wage pressures would exasperate inflationary pressures, keeping inflation high and prompting the Fed to continue raising interest rates.
Where inflation goes from here is a mystery that will only be discovered in time. Is the inflation picture actually improving or are we due for another summer head fake?
But there is evidence this time, inflation is improving. Wharton School of Business professor Jeremy Siegel has been making the point that forward-looking inflation indicators show inflation abating and has been calling for the Fed to slow or stop their pace of rate hikes. He points out that the most recent jobs report was “nowhere near as hot…as that first headline print” and even makes the prediction that rate cuts could happen far sooner than anyone is anticipating.
It is true that the yield curve, the difference between long-term and short-term interest rates, has been pushed to the point of inversion. In normal times, investors require more return for longer-term bonds reflecting greater risk of having their money invested over a longer time frame. But sometimes, like today, the relationship shifts, signaling the bond market’s view that longer-term rates will be lower than today’s rates. Some investors are pointing to the inverted yield curve as a sign the economy is headed for a recession, and they have good reason to interpret the yield curve inversion that way. Since 1950, an inverted yield curve has predicted every US recession with just one false signal.
But there is a different possible interpretation. The inflation we are seeing today could be caused by pandemic-related distortions that are in the process of sorting themselves out and the Fed may be able to rein in inflation without causing too much disruption to the labor market. The bond market is pricing in future interest rate cuts – the question is are the cuts going to be because the economy entered a recession or because the Fed successfully fought inflation?
What happened in the stock market - October 2022
October saw a strong bounce back across equity markets, though the returns were not uniform. As has been the case all year, Value stocks saw the return edge over Growth stocks. This Value outperformance is being sustained for several reasons.
- Value came into the year historically undervalued relative to Growth
- Pro-Value momentum is well established
- Growth companies are more sensitive to rate hikes
Backwards looking indicators of inflation remain elevated and monetary policy has a lagged impact on the economy, but traders are now expecting just three more rate hikes before the Fed hits the pause button. Uncertainty and anxiety seems to have abated as volatility is down and stock market prognosticators are getting more optimistic about the direction of the market.
And there may be some fundamental reasons to be optimistic about stocks, too. Despite the pressure from the Fed, earnings remain strong at the aggregate level, supported by Energy, Materials, and Real Estate. The S&P 500 operating margin held up well in the third quarter at 11.9%. This strong earnings picture in the face of a broad year to date stock market decline means that price multiples have fallen, making stocks more attractive in the long term. The S&P 500’s forward PE of 16.7 is right at the 25-year average and earnings are expected to continue growing in 2023 and 2024.
If stocks do continue to march higher, it will make sense to take a step back from your portfolio and evaluate how your experience was during this bear market. Our experience this year is much more typical of a bear market than 2020, which was unusual in how quickly the market fell and recovered. Sometimes the worst part of a bear market isn’t the magnitude of the drop in prices but rather the length of time the market is in a drawdown. Now is a great time to think about following up on how your portfolio performed and how you handled it personally.
One of the biggest issues we are seeing industry wide and in talking with prospective clients is their traditional portfolios are not performing as promised. Many investors receive rule of thumb advice to simply invest 60% of their portfolio in stocks and 40% in bonds as this represents a moderate risk profile, with stock risk being offset by the supposed safety of bonds. During the past decade, this advice worked fine, but this asset mix has performed terribly in 2022.
If you find yourself disappointed in your portfolio’s performance this year, reach out to a Burney advisor for a personal portfolio analysis.
What happened in the stock market - September 2022
Since our last update, 2022 has resumed reminding investors of what investing in the stock market can feel like, with a continuation of the selloff that began the year and of the decline of some of the more favored investments of 2021 like the ARK Innovation ETF. These trends can prompt questions for investors such as: What does this selloff mean for my portfolio? How will this downturn impact my ability to reach my financial goals? Will I have enough money now to retire on schedule? Feeling this uncertainty is only natural and driven by our behavioral biases and the financial media’s play on them, it can often lead to poor financial decisions. However, drawing support from data and a shift in mindset can guide investors through uneasy market periods like this year and help them stay the course.
Investing during a selloff is hard. Every day of stock market declines brings on a fresh bout of nervousness driven by investors’ behavioral biases. Loss aversion, or the cognitive bias that makes them feel twice as much pain from losses as they do joy from gains, makes them tune in more to what is happening in the market during selloffs than they otherwise would during good times. What’s more, the financial media, motivated by generating clicks and playing on their negativity bias, or their amplified emotional response to negative events compared to their emotional response to similar positive events, bombards them with headlines describing stocks sliding due to one factor or another. This moves investors to check their portfolios likely more than they should and creates an environment where they feel compelled to act by either making wholesale changes to their exposure to stocks or going to cash, both of which can have negative impacts on their portfolio returns and ability to hit their financial goals.
So what should investors do in times like these? Relying on data to guide financial decisions can be effective tools for managing the uncertainties that come with investing in a selloff. While it can often feel during these periods that stocks will be in a freefall forever and that investors are doomed to suffer through a bear market for the foreseeable future, this is typically far from the truth. Stock market selloffs, although a regular and healthy feature of the stock market, are not the typical market environment investors are subject to. Going back to 1928 there have been an equivalent 22 bull and bear markets and importantly, the bull markets have lasted longer, with the average bull market lasting 1,209 days compared to the average bear market lasting 356 days. This means that an investor is 3.4 times more likely to be investing in a bull market than a bear market and will be investing in a bull market in 7.7 out of every 10 years of their investing lifetime. A clear winner in favor of the good times.
Bull and bear market count and length is one thing, but what about returns? Here again the data gives us reason to rejoice. Not only is the average bull market longer than the average bear market, but its returns are also much more positive than the average bear market returns are negative, with an average bull market return of 133.1% compared to an average bear market return of -36.6%.
At a factor of 3.6 to 1, the positive returns of bull markets more than compensate investors for the extra pain from losses they must endure during bear markets. This additional return together with the relatively longer length of bull markets compared to bear markets paints the true, much more positive picture of what the experience of investing in the stock market has been like over time.
The data shows investors what has happened in the past and can inform them of what will potentially happen on average, however they can still be left wondering what to expect going forward specifically during the current selloff. Looking for answers from the financial media or economic forecasts is often a losing strategy, but what investors can do is notice that after every bear market since 1928 stocks have at some point reached new all-time highs again and based on this fact, they can adopt a mindset of considering the positive returns that would need to happen at each lower market level for the market to recover to new highs. Viewing declines through this lens, any additional amount of decline provides investors with the opportunity to capture the even greater positive returns needed to get back to new highs, or a concept that is more commonly described as now being “a good time to buy”.
Adopting this buyer’s mindset can be challenging due to the factors we’ve acknowledged already but fortunately reframing the upside can help. The key here is to ask yourself how long you think it will take for the market to recover and based on your answer to that question, to back into the returns needed to reach new highs over that time horizon. Using the average bear market decline of -36.6% and an even worse scenario of a -50% decline, the annualized returns needed to recover from a bear market can be particularly attractive and even when stretching the recovery out over five years, can be almost no worse than the 10% long-term average return of the stock market.
This reframing of the question to focus on what would need to happen going forward can provide investors with the confidence to stick with their investment strategy.
All data and mental frameworks considered, investing during a selloff is hard and there is not a one-size-fits-all strategy for dealing with these periods. Understanding the loss aversion behind their negative emotions, recognizing the financial media’s play on their negativity bias, and relying on data and reframing the upside, among other approaches (1) (2), can be effective tools for helping investors manage the difficulties of investing during a selloff. And sometimes, something as simple as talking through concerns with your advisor can be the right solution. If you are feeling nervous, reach out to us. We are here to listen and help guide you through all market environments, both good and bad.
What Happened in the Stock Market 10/2018?
Stocks sell off.
It is an inevitable, even healthy feature of stock markets. Yesterday, the previously high-flying NASDAQ led the market lower, falling by 4%. The primary reasons given for yesterday’s move included global stock market weakness, especially in China, and fears over rising interest rates.
If anything, days like yesterday underscore the importance of diversification. While Information Technology stocks account for much of the gains this year, they sold off more than defensive sectors, such as Consumer Staples. Small-cap stocks also held up better than Large-caps. Rotations in and out of certain types of stocks happen and happen quickly. This is a good reminder why we stay invested across all economic sectors even when a sector struggles relative to the others.
The macro story is still largely positive and, while the economy is not the stock market, strong economic activity is the long-term driver of corporate earnings and thus prices. Globally, 93% of countries have growing economies and U.S. companies, despite positive year-to-date returns, are cheaper now than they were at the start of the year as earnings growth has outpaced growth in stock prices. The fundamentals remain strong.
Prior to this week, we enjoyed a period of tranquil markets as there was not a move in the S&P 500 of 1% or more in any trading session during the third quarter. If you recall, there was a similar situation in 2017. These extended bouts of calm contrast sharply against the sudden 3-4% drop. Despite the barrage of notifications pushing headlines designed to grab attention, the truth is this type of move is typical. On average, there are 3.5 days like it a year.
Yes, stocks sold off yesterday and, yes, they could continue selling off. Or they could continue setting all-time highs.
Rather than react and make big investment decisions based on a bad down day(s), we encourage investors to reflect on what a 4% decline actually means for them and their financial future (if anything at all). Are there pending life events that might require you to balance your portfolio with additional, less volatile asset classes? Are you on track to meet your goals regardless of short-term market movements?
We are here and willing to have a conversation to discuss your questions and concerns. While we won’t be adjusting portfolios based on short-term gyrations, we acknowledge these movements can be scary and are available to listen.
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