Stocktake: Investors bid good riddance to October

The 6.9% fall of the S&P 500 was its biggest monthly decline in seven years, while things were worse in tech-land with the Nasdaq plunging 9.25%

Corrections are par for the course in bull markets, but investors are understandably spooked by the scale of the selling. The S&P 500 went 28 consecutive days without registering back-to-back gains. Photograph: Getty Images

Corrections are par for the course in bull markets, but investors are understandably spooked by the scale of the selling. The S&P 500 went 28 consecutive days without registering back-to-back gains. Photograph: Getty Images

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Well, that was ugly. October, that is. The S&P 500’s 6.9 per cent fall was its biggest monthly decline in seven years, while things were even more dire in tech-land, with the Nasdaq plunging 9.2 per cent – its worst month since the height of the global financial crisis in November 2008. Corrections are par for the course in bull markets, but investors are understandably spooked by the scale of the selling. The S&P 500 went 28 consecutive days without registering back-to-back gains, noted LPL Research, equal to the longest streak since the 1930s.

That streak finally ended at the end of the month after the index rebounded nicely. But even the rally was an unnerving affair. Last Tuesday the S&P 500 rose and fell more than 1 per cent five times during the trading day, while the previous day was similarly wild. Then, the Tick index, which measures the number of stocks rising at a given time, soared and then collapsed, recording an intra-day turnaround the scale of which has only happened once before, according to Bloomberg data going back to 1989. The Vix, or fear index, has been more muted, staying well below the highs registered during last February’s correction. However, while February’s selloff was a short-lived affair, current futures trading shows traders expect volatility to persist over the next three months. That suggests that while February’s downdraft was largely driven by technicals and lopsided market positioning, October’s selloff is a more serious affair driven by mounting fears regarding deteriorating fundamentals. Stocks can enjoy big gains even during difficult environments, of course. After a bloody October, traders will be hoping November proves a kinder month.

Bezos counts his record-breaking losses

Amazon chief Jeff Bezos made it into the record books last week, losing more wealth over a two-day period ($19.2bn) than any person in history as the stock plummeted following a disappointing earnings report. Investors hit the sell button after slowing growth figures added to fears the company is “beginning to saturate the US e-commerce market”, cautioned Gartner L2 analysts, although it’s equally true to say this was a belated recognition by investors that trees don’t rise to the sky.

Merrill Lynch’s monthly fund manager surveys show big tech stocks like Amazon and Netflix have been seen as the most crowded trade in global markets for nine consecutive months. Now, everyone is running for the exits at the same time as that crowded bet is finally unwound. Sharp drawdowns have traditionally been normal with Amazon. Bespoke Investment notes the company has spent almost half of its existence as a public company down at least 25 per cent from prior highs. The recent collapse marks the fifth occasion since 2009 that the stock has lost more than 25 per cent. Amazon’s last bear market was in early 2016, notes Ritholtz Wealth Management’s Michael Batnick, when the company was valued at $227 billion.

Remarkably, Amazon has shed more value in recent weeks than the entire company was worth in 2016, but it’s still up some 35 per cent this year. “Maybe the simplest explanation here is the most likely one”, says Batnick. The stock went “too far, too fast”.

Trump hoping for post-mid-term rally

Stock markets are “taking a little pause” because investors want to see what happens with the mid-term elections, Donald Trump suggested last week. A “little pause” is a rare example of a Trump understatement, and it’s fair to say investors are more worried about other issues – rising rates and bond yields, trade tensions, slowing global growth – than the mid-terms, which take place today. Still, it’s true that stocks have historically endured a tough time in the run-up to mid-term elections, only to to then rally in the following months. Over the past 18 mid-term election years, the S&P 500 has “never finished lower if you bought the October low and held till the end of the year”, notes LPL Research strategist Ryan Detrick, averaging gains of 10.6 per cent.

Many analysts believe the resolution of election uncertainty propels stocks higher; others say correlation is not causation, arguing economic factors have driven the rallies. Whatever the cause, investors will be hoping history repeats itself as oversold stock markets stocks enter their seasonally strong period.

Investors shrug off strong earnings

Unsurprisingly, companies that have missed estimates have been hammered lately. They’re not the only ones suffering, however – even companies surpassing estimates are being punished by investors.

Typically, companies that top estimates are rewarded with a 1 per cent share price gain that day, according to FactSet. During the current quarter, however, the average response to an earnings beat has been a 1.5 per cent decline.

The reaction is “telling something about investor psychology right now”, says Ritholtz Wealth Management chief executive Josh Brown. Earnings may be great – three-quarters of companies have beaten estimates – but markets look forwards, not backwards, and right now the fear is things will be less sunny in 2019.

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