October is shaping up to be one the most volatile months this decade and questions of "is this the start of a market crash?" are resurfacing. Of course no one knows that answer and while equity markets, specifically US, have not experienced a prolonged sell off in years, there are some encouraging signs amidst this wave of selling pressure.
While 2008 feels like a lifetime ago, it is important to remember what we experienced then vs.what is occurring now. During 2008, the S&P 500 declined 8 out of 12 months vs. 3 so far in 2018 (including October). Five of the monthly declines experienced in 2008 were 5% or greater and we have only experienced three months of similar magnitude since June of 2012. This is not to make light of the current volatility we are experiencing, but more so to put things in perspective. It is true that many global markets have experienced much higher levels of volatility over the years, but that is to be expected at times.
Historically, the types of drops we are experiencing are normal. Its hard to wrap our heads around this but it is much more "normal" than the type of run up the S&P 500 had over the last several years.
A barometer I look at during periods of extreme volatility are how defensive sectors (i.e. Consumer Staples and Utilities) are performing. The simple logic here is at the end of the day we still need things like toilet paper, toothpaste, shampoo. During tough times consumersstill consume power (utilities). If these sectors experience similar declines, then itcouldbe a sign of more troubling timesahead. In 2008, every sector experienced double digits declines. Most of these were-20%or more. This would be a prime example of panic selling. AsI write thison October 24th,consumer staples and utilities are positive for the month, while sectors such as Materials, Consumer Discretionary, Energy & Technology are down -9% to -13%. This could indicatesome of the selling is systematic, not panic, as investors move from economically sensitive sectors to more defensive ones. The technology sector has soared for 5 straight years which has increased the risk to the underlying markets. Afew tech names (Apple, Microsoft & Amazon) now comprise ~11% of theS&P 500, nearly double of what it was in2016! That is a staggering increase and leads to higher potential volatility as fewer names have a bigger impact on the broad indices. With fears of rising interest rates, tariffs and possible slow down in global earnings on the horizon, this sell-off is not entirely unexpected. It is not realistic to assume that the technology sector would continue to experience double digit annual returns. We have been critical of the Federal Reserve in the past for waiting far too long to raise rates and they are now dealing with it head on. It seems the current Federal Reserve is now boxed in a corner with less options to their disposal. Add the tariff issue and things are ripe for volatility.
The ironic thing is during the first half of 2018, consumer staples and utilities were near the bottom of the pack but are making a strong comeback and utilities are now near the top. I have said in the past and continue to say that orderly market corrections, like what we have experienced so far is healthy and at times needed. When markets go up on a straight line (i.e. 2017) and ignore warning signs along the way, that is worrisome and can lead to a much larger correction. While never fun, and this sell-off could continue, it is important to take a step back and remember this is what markets do. It can test your patience and cause you to worry, which is normal and expected.
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