Goodbye, summer. Hello, fall-itility.
Labor Day weekend has come and gone, and we’re all squeezing out those last precious moments of summer. But if you’re a market-watcher, your vacation may have ended a little early.
Equities are lurching around again. While there hasn’t been a lot of damage done, the day-to-day swings have been tough to stomach. For some, it’s invoked some memories of the big market drop earlier this year. The S&P 500 has traded in at least a 1.5% intraday range for five straight days through Thursday, something that hasn’t happened since March (and has been a rare occurrence over the past decade).
Swings like this may not feel good, but don’t let the smooth summer lull you into a false sense of security. Selloffs happen, even in healthy markets, and this particular bout feels pretty typical to us.
We’ll tell you why.
The market is moody.
You could point to a bunch of reasons why stocks were ripe for a selloff: coronavirus, U.S.-China relations, high unemployment, the upcoming Presidential election, no fiscal aid agreement. We could go on.
However, why investors are selling now remains a mystery. We still haven’t seen any major headlines or triggers for this volatility. The market was able to ignore these concerns for most of the summer. In fact, the S&P 500 just posted its best August since 1986, a month in which the index fell in only five of 21 trading days. Then, we flipped the calendar to September, and the market’s mood switched from complacent to anxious. So far, the benchmark has dropped 6.8% since reaching a record high on September 2.
The only headline that caught our attention was on Thursday, when a deal for a fresh package of government aid was struck down in the Senate. The S&P 500 tumbled 1.7% that day.
The lack of an obvious catalyst makes us think this selloff could just be a quick market reset, one that’s typical in markets that run too far, too fast. In fact, the S&P 500 has averaged about two declines of 5% or more a year since 1950.
Sure, this is no average year, but breathers may be needed in market recoveries too. In 2009, the first year of an 11-year bull market, the index faced four separate drops of 5% or more. Three of those happened after stocks bounced in March 2009.
To be fair, market mood swings have the potential to be powerful. If you can’t pin a reason on why a selloff started, it’s tougher to know when it’ll be over. And, as we stated above, there are plenty of simmering issues that could flare up at any time.
Tech stocks are getting pummeled.
Cooler temperatures are just around the corner, which means it may be time to switch out your summer wardrobe for some sweaters. Some investors are taking the opportunity to change out their closets and their portfolios.
It’s been a rough month for tech so far. Tech stocks, the darlings of the recovery, have been the hardest hit over the past few days. In fact, the tech-heavy Nasdaq 100 Index fell 10.8% in just three days, its quickest 10% slide since January 2000. The FAANG stocks — Facebook, Amazon, Apple, Netflix and Alphabet (Google) — have dropped 11% since September 2. Tesla, a notorious high-flying stock, has plunged 17% over that same period after it was rejected from being one the S&P 500’s latest round of new members.
The tech slide, while painful, has showed that investors may just be taking some profits, or selling what has worked during the recovery. Value stocks have held up markedly better in this rout.
Valuations are high (everywhere).
Even after the latest drop, the S&P 500’s price is still 23 times higher than its expected earnings over the next 12 months, according to S&P Capital IQ data. That’s the most expensive stocks have been since at least 2000.
Here’s the deal, though. While valuations have hinted to overstretched markets in the past, it’s tough to say where stocks should be trading right now. We just witnessed the fastest bear market and one of the fastest recoveries on record. The Federal Reserve is more engaged in the markets than it has ever been, which has distorted reality with record low Treasury yields.
One thing is for sure: When investors’ expectations for the future rise, stocks tend to rise as well. High expectations can leave a lot of room for disappointment, and investors’ fortunes can turn quickly when markets stray too far from the economy and earnings. That’s still a major risk here, but valuations alone aren’t enough reason to expect another historic slide.
Ups and downs are normal.
Temperatures may be cooling, but tensions are high in the stock market. It’s understandable — it’s been an unusual year, and nobody knows what will happen next. Ups and downs are par for the course in investing. That’s why keeping your eyes on your goals is so important.
The macroeconomic environment is far from normal, and the U.S. economy has a lot of healing to do. While the road could be bumpy through the end of the year, we expect the Fed’s unwavering help and the chance for positive news on a coronavirus vaccine, the economy, or fiscal stimulus to keep stocks afloat for the time being.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.