If you looked away for half a minute today, you may have missed a 200 point swing in the DJIA in either direction. The Nasdaq officially fell into a correction… the first of the major U.S. markets to do so. Remember: A correction is a ten percent decline from an index or security’s most recent highs. It’s not a crash… at least not yet.

It’s Volatility with a capital V, and we are in the throes of it. Guess what? That’s normal for October. It may have felt like we were thrown out of a moving car, but that’s because the 3rd quarter was one of the least volatile quarters since 1963. It hurts, and the anxiety level is sky-high.

Here’s the losses across the major markets since start of trading yesterday:

DJIA: -5.25% or -1,388 points

S&P 500: -5.06% or -145 points

NASDAQ: -4.74% or -365 points

VIX: +57.76% or 9.26 points

Now, let’s put it into perspective.

October is notoriously rocky - especially in election years.

Ryan Detrick of LPL Financial puts it into focus:

“It was the first year since 1963 that the index’s usually volatile third quarter didn’t have a single 1% change (up or down). The S&P 500 had gone 74 consecutive days without a 1% move—the 10th longest streak in history. The bottom line is: Equity markets were wound tight and some type of volatility was likely.”

 

Why it Matters:

The historical perspective is always useful. It makes Wednesday’s sell-off a little easier to swallow. Michael Batnick of Ritholtz Wealth Management cast an even bigger net over the 800-point sell-off we saw yesterday.

He notes that yesterday was the third-worst point decline for the Dow since 1915. But it was only the 284th-worst day in history, and a Black Monday type of event would have whacked nearly 6,000 points off the index.

This would have been a very different column had that happened. Batnick’s chart paints a more palatable picture, kind of like looking at a geological timeline of Earth, except shorter and our money is in those markets.

What’s Next:

Friday, thankfully. But we are only in the first trimester of October and we have a midterm election coming up in less than a month. That will add more volatility to the mix.

Ryan Detrick again on midterms and markets:

  • Stocks tend to do very well after midterm elections.The average 12-month gain from the lows in a midterm election year is over 30%, and since 1946 the S&P 500 has never been down 12 months following midterm elections. That means we may have just entered the best 9-month period for stocks in the entire 4-year presidential cycle.

  • Pullbacks are normal. Even though stocks tend to average a 7–8% gain each year, they also tend to have three to four pullbacks each year (5–10% drops) and at least one 10–20% correction.* We got both earlier this year but history tells us we may get more.

If you are a long-term investor you have to be able to handle the dips and the rips. That doesn’t excuse you from diversifying your portfolio and making sure you aren’t taking more risks than you can handle. It’s been a great ride for stocks the past 9 years, and especially the past 2 years. If you need to take some profit off the table and put it somewhere a little more secure, it’s your money. Protect it.

Caleb Silver - Editor in Chief

 

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