U.S. stocks are off to a rough start to the fourth quarter, with the S&P 500 index down 5 percent since the beginning of October and the Dow Jones Industrial Average dropping more than 1,300 points in a two-day stretch earlier this month. The midterm elections, trade war uncertainty and rising interest rates are among the top concerns for investors at the moment, but LPL Financial chief investment strategist John Lynch says now is no time to panic. Lynch recently listed 10 reasons why the U.S. stock market is still in good shape despite the recent volatility.
Market volatility is overdue.
This quarter’s volatility may be on the extreme side, but Lynch says it comes after the S&P 500 experienced one of its least volatile third quarters in history. In fact, this year was the first time since 1963 that the S&P 500 didn’t have a single day throughout the entire third quarter in which the index moved up or down at least 1 percent. Prior to the early October sell-off, the S&P 500 had gone 74 consecutive days without a single-day move of at least 1 percent, its 10th-longest streak in history.
October is a volatile month.
Not only was the stock market wound particularly tight heading into the fourth quarter, Lynch says the month of October has historically been a volatile period for stocks. In addition to major October crashes in 1929 and 1987, U.S. stocks experienced a dramatic 16.9 percent sell-off as recently as October 2008. In fact, going back to 1950, the S&P 500 has experienced 362 days of at least 1 percent moves during October daily trading sessions, 58 more than any other month of the year. Despite the volatility, overall October returns are roughly average compared to other months.
The economy is fine.
Investors have been particularly concerned with the impact rising interest rates could have on earnings growth. However, the unemployment rate is at 3.7 percent, its lowest level since 1969. Even after three more rate hikes in 2018, the fed funds rate is currently at a range of between 2 and 2.5 percent. As recently as 2007, it was above 5 percent. Lynch says consumer spending is on the rise, business confidence is high, and manufacturing surveys are positive. Even inflation has retreated from 2.9 percent in July to just 2.3 percent in October.
There are pre-election jitters.
If there’s one thing investors hate, it is uncertainty. When it comes to Washington policies, there’s never more uncertainty than the period just prior to elections, which is why the S&P 500 has been relatively weak prior to recent elections. Companies and investors want to know what kind of policy changes to expect from Washington before they invest, and many are likely in wait-and-see mode until the election results are in. In fact, the S&P 500 registered…
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