As of the end of September, the S&P 500 had posted a total return of 10.6%, already more than the annual historical average of 10.2% from 1926 through 2017, according to Ibbotson Associates/Morningstar. So perhaps what happened in October shouldn’t have come as much of a surprise. However, after relatively smooth sailing for the last several months, October offered up more Halloween tricks than treats for investors.
The S&P 500 lost 6.8% in October on a total return basis, closing 7.5% below its all-time high set on September 20. Only two of the 11 S&P sectors finished the month in the black with Consumer Staples (+2.3%) leading the way. The worst showing came from Consumer Discretionary, down 11.3% for the month. October’s sell-off in equities resulted in a $3.11 trillion decline in total U.S. equity market cap, according to data from Bloomberg.
Most market watchers viewed October’s market activity as a normal pullback and not the beginning of a bear market. That is not to say that storm clouds could be forming on the horizon. Many worry that the Federal Reserve’s path of higher interest rates in 2019 is too aggressive. The deteriorating trade situation between the U.S. and China could also have global ramifications. The November mid-term election results add intrigue, with gridlock in Washington, D.C. already at an all-time high.
However, there is much to like about the current economic and investment environment. U.S. GDP growth is in excess of 3%; interest rates are still well below historical norms; the labor market is robust; and corporate earnings continue to be strong.
AAII Weekly Survey Question
In the aftermath of October’s market turmoil, last week’s survey asked:
What is the biggest takeaway from October’s market activity?
Here are the results of the survey:
In all, 1,608 readers participated.
The biggest block of voters–40%–say that down months such as October are the price investors must pay to reap the long-term rewards the stock market offers.
Another 22% of our readers say that the reason why they have an investment plan is to be able to ride out months like October.
In a close third place, 21% of respondents say that the market decline that took place in October was part of a normal bull market and that the overall uptrend is still intact.
Eight percent of readers say the biggest takeaway from October is that it’s time to buy the dip.
On a more pessimistic note, 5% of readers say it is time to rethink their investment strategy and 3% believe the bull market is over.
Weekly Special Question
Based on what happened in the market during October, last week’s special question asked our readers:
How has your investment outlook for the next 12 months changed after October’s market decline and spike in volatility?
In all, we received 207 responses.
Given the results of last week’s reader’s survey, it probably isn’t surprising that 58% of readers say their investment outlook hasn’t changed despite the drop in the market in October.
Roughly 12% of those answering the special question believe a bear market is around the corner or they expect lower market returns moving forward.
Slightly more than 10% of readers say they have a more cautious outlook and have taken steps to lower their exposure to stocks or have increased their allocation to “safer” assets such as bonds, cash or CDs.
Nearly 5% say they expect volatility to remain higher than it has been.
Here is a sampling of the responses from our readers regarding how their investment outlook has changed in the aftermath of October’s market decline and increase in volatility:
- “I’m looking at somewhat more defensive positions and am also putting more into funds and less into individual stocks.”
- “With valuations high, economy peaking, interest rates rising, etc., it’s hard to see financial market returns next ten years matching the last ten years.”
- I’ve never liked long bonds, especially bond funds, too much memory of seeing them lose value in rising rate, inflationary environment. That basically leaves equities and short-term individual notes and bonds as investment options unless one has the resources (money, knowledge, and personality) to invest in real estate or small businesses. So, some quality stocks and something like the Level 3 portfolio is probably where I’ll stay.”
- “Volatility is always good if you are building your portfolio. Know what you want to buy and determine the price you will pay. Then follow your plan.”
- “Planning hasn’t changed, but I anticipate more volatility.”
- “One month does not make a difference in 40 years of investing.”
- “My outlook has not changed as I am a long-term investor and not a trader. The stock market is schizophrenic and follows the laws of statistics, especially the law of regression. The laws of physics also apply in that anything that goes up will come down at some point in time.”
- “Equities remain a better choice than alternatives.”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.