The dollars running, stocks are falling, bond prices are jumping while commodities are tanking. Welcome to another week in the financial markets. Expect more of the same in October.
As September, the worst month of the year for markets, comes to a close (next Tuesday) volatility appears to be rising. Stay strapped down, however, because we are not through the woods quite yet. Historically, the first two weeks of October can get pretty hairy. Some of us might recall October of 1987 as an example.
So many of us have nudged up our exposure to the equity markets this year in pursuit of more and more gains that any sell-off scares the bejesus out of us. The 1-2% pullbacks, like investors experienced on Thursday, is a shock to our system. If you can’t stand the heat, get out of the kitchen or so the slogan says.
Does that mean you should raise cash, sell your equity holdings and wait to jump back in after the correction? If you can do that, “you’re a better man than I, Gunga Din.
In markets like this “volatility” is another name for stock market declines. Heading into October, therefore, don’t be surprised if we have more of this same kind of action in the weeks ahead. The best advice I can give is to hang in there, ignore the paper losses and look ahead toward the end of the year. I am convinced that whatever losses you may incur will be made up before January.
The U.S. dollar is still climbing after experiencing a decade-long period of underperformance. Usually, a rising dollar and a rising stock market can continue in tandem. That makes sense because the engine that drives both markets is a growing economy. Like the Fed, I believe that is what is happening in this country.
However, that does not mean that all companies benefit from a strong dollar. Export stocks, many of which you will find among the S&P 500 Index can and will be hurt by the fact that every gain in the dollar makes the products they sell more expensive to foreign buyers.
Non-U.S. sales account for roughly two thirds of total sales among companies in the S&P and 62 of the largest exporters generate more than 50% of their profits from exports. If the dollar continues to strengthen (and most currency analysts think it will) then the impact on the S&P 500 Index could be substantial. Why is that important?
Over the last several years the S&P 500 Index was the best performing equity index in the world. Prior to the financial crisis, other indexes (international, emerging markets, small or mid-caps, etc.) did better. The S&P 500 Index also happens to be the index most professionals use as a benchmark of comparative performance. As such, it has been hard to beat an index that has performed so well. This could change.
In the future, savvy investors may re-focus their interest on other non-S&P stocks or indexes for better performance if the dollar’s strength turns out to be a longer-term trend and I think it will. I suspect that some investors (myself included) are already making the switch.
In any case, chances are high that the market will put us through the wringer (wash, rinse and repeat) in the days ahead.