We didn’t get it all back, but Friday’s cute little relief rally has investors breathing a little easier going into the weekend. At least we won’t have to endure any ‘Markets in Turmoil' TV specials on Sunday night, or photos of exasperated floor traders on our newspaper front pages this weekend.
It’s been quite a week, so let’s take stock of it and ourselves:
From Wednesday to Thursday, about $8.5 trillion in market cap was wiped off of U.S. markets.
The DJIA fell more than 1,300 points or 5.25%, and the S&P 500 shed 145 points or 5.06%.
The Nasdaq fell into, and then out of a correction between Thursday and Friday.
Our readers were flocking to our site, looking up terms like: Correction, Buy the Dips, Sell-Off, Bearish Engulfing Pattern, Bailout, Naked Shorting and Put. You would’ve thought it was 1929 all over again.
Why it Matters: Or should we say, “What Matters”. Perspective matters, and we scooped out a healthy dose of it yesterday. To sum it up:
Sell-offs happen, and they are not infrequent. We had a similar one in August, March and January, yet the market churned higher. Year to date, here’s where we stand:
Nasdaq Composite: +8.06%
October is a volatile month
Octobers preceding election years can be even more volatile, but have historically kicked off extended rallies
Our markets have become so big that a 5 percent decline puts some big ugly red numbers on the board, but it takes a lot of prolonged selling to prompt a crash. Remember:
Selling begets selling among institutional investors, but that doesn’t mean we need to capitulate. Selling into a falling market is never a good strategy. If you are desperate and need cash immediately, the stock market was never the right place for your money.
What’s Next: Earnings season is officially underway. Banks like JPMorgan, Citi and Wells Fargo, reported today and had mostly good news. Their balance sheets are strong, their customers feel confident and lending is happening, despite rising rates. Like Jamie Dimon, most bank bosses are worried about geopolitical issues such as trade wars and rising populism. We all are.
We can’t say there won’t be another sell-off next week. Don’t listen to anyone who says they can. That said, there is still a lot of uncertainty lurking out there that we should be attuned to:
A trade war with China. Most economists agree that it will only shave off a few tenths of a percent of GDP if Xi and Trump can’t make an artful deal. They meet in November and it’s in both countries' best interests to work it out.
Earnings! Heavy load next week, with Netflix, BlackRock, Johnson & Johnson, American Express and loads of others. Nasdaq has a nice earnings calendar if you want to stay up to date. Two thirds of S&P 500 companies have already reined in their forecasts for Q4, but sometimes they like to set a low bar and then show some upside surprise. So clever. We’ll be paying attention to what they say about the health of the consumer and whatever is keeping them up at night.
Buybacks have Slowed: The NYT pointed this out in an astute article yesterday. As we know, a record amount of stock buybacks have been announced this year. But, in the weeks heading into earnings, companies yank the reins on buybacks because they don't want to give off a whiff of insider trading. As we know, stock buybacks can make companies look more profitable since they reduce the amount of shares available to the public. They are perfectly legal, but it makes sense that we would see a slowdown at this point in time.
Side note: We saw a 200 percent increase in readers searching our Rule 10b5-1 term yesterday. That rule outlines the regulations around corporate insider buying and selling for both executive and company buybacks. Connection?
Algorithmic Trading: We are not going to blame the machines for all the volatility lately, but you can’t ignore the fact that there are so many algo trading platforms that are programmed to buy or sell when markets, stocks or any securities trigger key levels. We’ve had a lot of technical analysis support levels breached this week, which can send signals to trading software programs at major financial institutions in a nano-second and move billions of dollars before we can blink an eye. It’s the new normal and every major financial institution on the planet is headed this direction, so we have to get used to it.
Enjoy the Weekend!
Caleb Silver - Editor in Chief