I’m confident that most would agree that as you climb in years the years seem to go quicker and quicker, so when I say I’m surprised it’s already Autumn you probably understand where I’m coming from. When I say I’m surprised it is already Autumn of 2020 though, well, that has something of a different feel to it.
“Imagine yourself at the beginning of the year. You have knowledge that within weeks a novel virus will emerge that will shut down much of the global economy. Businesses will close, sporting events will be canceled, your daily routine will be altered, travel plans will be derailed, and tens of millions of Americans will be thrown out of work.
There is no preventative vaccine, no cure, and the virus can be contracted like the common cold or the flu via airborne contact.
This will turn into a health and economic crisis that no one alive has ever experienced.
It sounds like a script created in a Hollywood studio. Yet, it’s the reality of 2020.”
It has certainly been an unusual year, and we’ve still few more months of it to go before the new year. That is not to say turning the corner on a year suddenly means a calmer less infectious new year, but I am going to remain optimistic on that front.
The ebbs and flows of 2020 have certainly made for interesting times in many areas of life, including the markets for which we are here. The swift spread of the coronavirus was a heavy motivating factor in the rapid market crash from February to March, with an over 37% drop from February 12 to March 23 in the Dow. The S&P performed similarly with 34% drop overall. The recovery has not been quite so rapid, though as recoveries go it could end up being one of the quickest recoveries from a crash in market history. The Dow and the S&P 500 since March have both already had the best 100-day gains since 1933. We will just have to wait and see how long the full recovery will take.
The upward back and forth trend from the low in March seemed to steady out some from June through the high on September 2 where we started to hit another downward trend with increasing volatility again. The pandemic has thrown out much of the rule book on market modeling however we can look to history for interpretations on seasonality that can provide a bit of investing calm during the coming months. Two specific ideas seasonality that can shed some light on the current volatility are the September Effect and the October Effect, both of which are market anomalies not tied to specific market events. The September Effect is a worldwide anomaly in which we typically see declines in the market, though the Effect has been in decline in recent years it is still something we watch for and expect. There are a couple of potential reasons for the Effect that have been theorized such as the return of vacationing investors to the market selling off positions held over summer and, many mutual funds have September as the end of their fiscal year and as such sell off losing positions then. The October Effect is rooted more in superstition than in fact where we see investors believing there will be a decline in October even though historically statistics do not support this. Investors being driven by emotions though end up with the October Effect being a self-fulling prophesy. “It's easy to feel panicked by changes in the stock market, especially when the media reports on every single move. But you should try to avoid making any fear-based, impulsive investing decisions.” We watch for these potential declines every year and the buying opportunities they present.
We have also been expecting additional volatility because, wait for it, we are now amid an election year, in the middle of a pandemic no less, that some might consider tumultuous. Election years offer a degree of uncertainty on policy issues and the like in general and this year just keeps on multiplying the variables. Investors hate uncertainty and investors making decisions ruled by emotion over logic make panicked decisions and panicked decisions cascade.
“fear has a tendency to spread from person to person. This may occur even though there was initially no rational basis for fear. As a result, a group of people unknown to one another may spontaneously come to adopt emotional unity.”
“As social beings, we interpret the danger of the situation based on how other people react. When the herd instinct kicks in, people suspend judgment and start doing what everyone else is doing.”
Or as Warren Buffet said:
“Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.”
That is good for the investor that pays attention to the fundamentals more than the mood, that is good for you. The markets are still in recovery mode and there will continue to be some exceptional volatility as we all continue to navigate what is the current abnormal normal, we welcome the added volatility.
If you would like to discuss this, or anything else, please do not hesitate to reach out to us. As always, thank you.
https://www.horsesmouth.com/
https://www.psychologytoday.com/us/blog/science-choice/202003/7-reasons-panic-buying-behavior
https://www.forbes.com/sites/billgreiner/2015/12/16/market-volatility-and-presidential-election-years/#6bdab80553a5
https://www.visualcapitalist.com/sp-500-market-crashes/
https://www.visualcapitalist.com/sp-500-market-crashes/
https://livelyme.com/what-is-the-october-effect
https://www.investopedia.com/terms/o/octobereffect.asp
https://www.barrons.com/articles/the-s-p-500-is-resting-on-the-100th-day-of-the-rally-51597337402
https://www.thewealthadvisor.com/article/warren-buffett-says-volatility-gift