Ron Rough, Chief Investment Officer, discusses what happened in investment markets this past quarter and shares his thoughts about to the next quarter.
October Stock Market Update Transcript
This is Ron Rough with the market update for October. This was the first quarter in a while that things were pretty muted for the markets. Since the lows of March of last year, the pandemic lows, it has just been quite a spectacular run by stocks. And now for this third quarter, things were pretty quiet. If you look at this table here, you can see that with the exception of the S&P 500 being slightly up, most areas of the market were actually down 2-4%, and that includes even fixed income, pretty flat for the quarter. So things were pretty quiet.
And what’s interesting, if we go to this next chart, which is the S&P 500, you can see what a steady run it’s been for the entire year with the exception of this little 5% correction we had in September. Now, what’s interesting, if you look at this chart, the S&P 500 is what we call a cap-weighted index, which means that the largest companies inside the index – think of Apple and Microsoft and Facebook – carry a much bigger weight in the returns of the index than a smaller company, say, Etsy.
And yet, if you look at this next chart, this chart is the Value Line Index. It’s 1,700 stocks, and it equal weights all 1,700. So it gives you a better sense of the average stock, how it’s performing. And notice from this chart that the average stock peaked back in the summer, back in late June. And really since then, for the last three or four months, it’s just been up and down with no real progress. This gets to a concept we talk about a lot in our updates around participation. For us, a sign of a healthy market is when the average stock is doing better than the big cap leaders. And what we’re seeing here over the last three months is that’s not been the case.
Now, the first six months of the year, that was the case. It was a very healthy market with the average stock leading the way. But over this last third quarter, we’ve seen the average stock really struggling to make any progress in relation to large-cap stocks. And then, if I kick over to an international index, you can see it has the same look. International stocks peaked back in the summer. And since that time, they’ve been kind of in almost, you would say, a downtrend, but it’s been choppy, but with kind of a downward bias.
And so for us, that’s been the element that’s been a caution flag for us. At this point with the market only down 5% or so, none of the safety nets have been triggered in any of our holdings, but at this point, we’ve got the yellow flag flying in that we are watching these things daily and you could see trading activity pick up in October.
So let’s talk about October getting through the end of the year. What are the prospects? Well, it’s interesting. October certainly has a reputation as being a scary month. If you look at… We’ve had three market crashes in the history of the US: 1929, 1987, and 2008. All of those happened in October, interestingly. Also, if you look at the intra-month declines month by month, so whatever the high point of the month versus the low point of the month, the month of October actually has the highest spread of any month of the year; 3% versus 2% on average than the other months. Also, if you count the number of 1% days in the market, either up 1% or more, or down 1% or more, October has the highest number of those than other months in the year. And this is looking at data going back 30 years.
So all of that gives you an idea that there’s certainly a lot of volatility in October. However, what’s interesting for the month of October, it actually has an average gain of over 1%, 1.4% versus 1.2% on average for the other months of the year. So if we can hold on through the volatility, ultimately, there could be a positive end for the month. And then on the other side of things, if we look at the rest of the year, the months of November, December, January, that is the three-month window with the strongest returns in the market. So we are heading into what is seasonally a more favorable time of year. But the month of October, we’ve got to get through where there’s a lot of volatility.
Now, every year it’s different. So just because there’s a historical tendency certainly does not mean that it has to play out that way every year. And if you think about this year specifically, we’ve got issues around raising the debt ceiling. We’ve got issues around inflation picking up. Will there be an infrastructure bill that’s passed for the end of the year? So there’s a lot of things that are occupying investors’ minds right now. And so the markets could play out very much according to historical tendencies or not. So we’ll just have to wait and see, but just know that we are definitely monitoring each of the positions in the portfolios, and if we need to sell, then we will absolutely do that.
So that’s all I have for today. Thank you for watching and we’ll see you next time.