Stocks had a wild ride in October-but that won't be the last time we see volatility. Photo by Getty Images/Stringer.
November is here, and with it comes the end of "financial hurricane season"-that two-month stretch pundits (and purveyors of seasonal myth) tell us contains the worst month and the crashiest month. For a while, stocks seemed to follow that mythological blueprint. They finished down a bit in September and kept sliding as October progressed. But then they stopped! And bounced! High! And in the process illustrated why long-term growth investors are usually best off tuning out the noise and looking past short-term volatility-and not trying to time markets' short-term swings.
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If you look just at stocks' cumulative return in September and October, markets seemed quiet. The S&P 500 rose 1.0%, and the MSCI World Index fell -2.1%.[i] "Meh, normal volatility, wake me for something more interesting," might be your general take. However, the ride was not smooth. When markets closed on October 16, the MSCI World was down -8.7% since August's end. The S&P was down -6.8% through October 15 and fell another -1.5% the following morning, before rebounding to finish the day up a wee bit.
And then, a bounce! The MSCI World rose in nine of 11 trading sessions, gaining 7.3% through October's end. The S&P rose in eight of 11, gaining 8.4% and closing October at a new all-time high (its 118th of this bull market). Here, pictures.
Exhibit 1: Financial Hurricane Season, Global Edition
Source: FactSet, as of 11/3/2014. MSCI World Index returns with net dividends, 8/29/2014 - 10/31/2014
Exhibit 2: Financial Hurricane Season, US Edition
Source: FactSet, as of 11/3/2014. S&P 500 Total Return Index, 8/29/2014 - 10/31/2014.
Now, that October 15/16 trough is what industry types would call a "buying opportunity," inferring investors should have a) sold out when September began so they could buy back in lower, or b) kept some cash on the sidelines to put to use when stocks were down.
This sort of thing works great in theory. Buying low and selling high is how you make money! But in real life, buying low is extraordinarily difficult. Usually, when stocks fall fast, so does sentiment. We get scared. Headlines get all hypey and make us even more scared. It was no different this time around. Here is just a sample of the doomy-gloomy headlines we all had to contend with on October 15 and 16:
Some articles did encourage investors to grit their teeth and hang on, but they were largely drowned out by high-profile warnings stocks were too "expensive" even after the drop. Even after stocks began rebounding, headlines told us markets still looked dicey. It would have taken nerves of steel to realize all that deep fear was probably already baked into current prices and to see the buying opportunity for what it was.
Since there are millions upon millions of investors globally, we imagine at least one or two timed that buying opportunity perfectly. Luck happens! But for most folks, this would be an impossible feat. This is only a rough indicator, but equity ETFs bled assets through October 20-total outflows that day were $6.9 billion, the highest since early August. Even though the S&P 500 finished that day up 2.2% off the low. This implies we're wired more to seek "safety" when stocks are down and interpret a nascent bounce as a selling opportunity than to see a dip as time to buy. Again, it's rough and anecdotal, but illustrative nevertheless.
We've said it before, and we will probably say it again: We don't know of anyone in history who could perfectly, repeatedly time these short-term swings-at the top or bottom. Anyone who could would have a legion of followers, dozens of books written about them, top billing on financial talk shows-basic legendary status. No one fits the bill. Some get lucky once or twice, but for every Jesse Livermore there is an Irving Fisher.[ii] The real legends are people like Ben Graham, who encouraged rational long-term thinking. It was Graham who reminded the world, in the short run, the market behaves like a voting machine, registering feelings, but in the long run, it acts like a weighing machine, pricing in the likely fundamental reality. Tune out the wobbles and think long term.
Note, we aren't advocating a pure buy and hold approach here. If a bear market is forming, and you can identify it before the majority of the downside has passed, it can make sense to get out. Bear markets, which usually fall -20% or more, are typically long (several months to a year or more) and have identifiable fundamental causes, so they're possible to navigate.[iii] You probably don't need to, considering stocks have historically outperformed all other similarly liquid assets over the past 88 years even with 13 bear markets along the way, but you can, and it's nice. But if you're investing for long-term growth, in our view, it is unwise to be out of stocks unless you have a strong, fundamental reason to believe stocks are likeliest to fall and fall a lot over the foreseeable future. Sitting on the sidelines during a bull market carries a big opportunity cost and could make it exceedingly difficult to reach your goals. If you need long-term growth, being in stocks when they're doing that long-term growth thing is paramount.
Perhaps you're thinking this is all moot now that stocks are back in the black.[iv] But volatility is always with us, and October's pullback won't be the last. The next time you see headlines encouraging the world to wait for a dip or time a historically volatile month, just remember: Easier said than done!
Stock Market Outlook
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[i] FactSet, as of 11/3/2014. MSCI World Index returns with net dividends and S&P 500 Total Return Index, 8/29/2014 - 10/31/2014.
[ii] Ok, not the greatest example, because the market calls in question happened at the 1929 peak. Just illustrative.
[iii] During bear markets, the short-term up moves are the noise you're best off tuning out. But that is a topic for another day, in another market environment.
[iv] At least the S&P 500 is. The MSCI World remains a bit short of its most recent all-time high, which it set July 3.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.