Bad Day on the Stock Market
by Brad McMillan, CIO, Commonwealth Financial Network
The big news as I write this is that the stock market is down more than 1 percent. That translates to more than 200 points for the Dow, 30 points for the S&P 500, and 80 points for the Nasdaq.
Looking at the screen, I see nothing but red. Ouch.
Drop seems scarier than it is
This drop is particularly painful given how long itâs been since we saw any volatility. The markets have essentially bounced within a narrow range since early July, so we've gone two months without experiencing any turbulence.
Of course, the past two quiet months have been an aberration; we donât have to look too far back to see some real volatility. At the end of June, there was a much bigger pullback, with the S&P 500 down 113 points, or more than 5 percent. At the start of the year, we saw a drop of 281 points on the S&P, or 13 percent, from the late-2015 high to the mid-February lows.
In context, then, todayâs drop is normal. As I write this, weâre down about 43 points from the high in August, or less than 2 percent. Weâve seen this kind of decline several times in the past couple of months, albeit over a couple of days rather than one.
That isnât to say it wonât get worse; it might. But we do need to distinguish between normal moves and those that warrant our attention. This drop isnât there yetânot even close.
Probably the usual September volatility
With investors returning to the office from August vacations, catching up on the news and considering how to prepare for the end of the third quarter and the start of the fourth, September has historically been the worst-performing month of the year. I said as much in my September market preview, for exactly those reasons. What we're seeing now is in line with history and with market expectations.
Big drops are scary, which is why itâs important to have that historical and fundamental context. Personally, I start to pay attention when the markets get close to their 200-day moving average. For the S&P 500, that's around 2,060; for the Dow, itâs around 17,600. That means Iâm not going to worry until we lose at least another 70 points for the S&P, or about 640 points for the Dow, which would be another 3â4 percent for both, bringing us down a total of just over 5 percent.
That may sound like a lot further to fall before we start worrying. Shouldnât we pay attention before that? We certainly could, but the 200-day line is where the probability of a more severe drop becomes material. Before that, chances are strong that the decline will reverse itself.
Plus, fundamentals remain solid
As I wrote the other day, any September volatility should be cushioned by strong fundamentals. Consumers remain both able and willing to spend, despite weakness in business sentiment data. Arguably, any pullback this month would be a rational response to that weakness, rather than something much worse.
We will see. In any event, the real economy, which ultimately drives the financial markets, continues to limp along. As my market risk analysis showed yesterday, immediate risk levels remain low and are even improving.
Iâm certainly not enjoying todayâs market theatrics, but Iâm not particularly concerned either. So far, at least, the markets are acting normally and as we might expect.
Right now, the biggest risk investors face isn't volatility but the urge to overreact to it. Keep calm and carry on.Â
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Commonwealth Financial Network is the nationâs largest privately held independent broker/dealer-RIA. This post originally appeared on Commonwealth Independent Advisor, the firmâs corporate blog.
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