By Kostya Etus, CFA®, Head of Strategy, Dynamic Investment Management
Happy Halloween! There are many scary movies that come out around this time of year, but
some of the scariest stories are in the financial media. Recession looming, high inflation,
inverted yield curve, rate hikes and many other fear mongering phrases continue to be
highlighted in the press. However, it’s important to remember that just like in the movies, the
media loves a good scary story.
The stock market has actually been rebounding since about mid-October—despite the headlines. The primary drivers for this growth have been:
1. Corporate Earnings: Results have generally been favorable (meeting or beating
expectations); approximately 20% of S&P 500 companies have reported third quarter
earnings with about 73% exceeding earnings forecasts.
2. Oversold Conditions: Investor sentiment had reached excessively pessimistic levels in
early October—the lowest since 2008, according to the AAII bull-bear sentiment
indicator. This tends to be a contrarian indicator and often sets up the market for a
bounce.
3. Hints of Fed slowdown: Some Federal Reserve officials have begun to signal a desire
to slow down, or even stop, the raising of interest rates early next year.
Is this a short-term reversal or have we seen the market hit bottom?
The last component mentioned above is perhaps the most important indication to help
identify a potential market bottom. When inflation begins to drop and the Fed jointly reaffirms a desire to stop the rate hikes are when we’ll most likely see a more prolonged market
rebound. Unfortunately, only time (well, and the Fed), will tell.
If history is any guide, trying to determine when the market will bottom, or peak for that
matter, has a low probability of success. Timing the market is nearly impossible, and one of the
reasons is because some of the best days of the market happen right around some of the
worst. A few key observations from the chart below, “The Best and Worst Trading Days
Happen Close Together”:
1. Most of the best days cluster around the worst days.
2. About half of the best days happen in years with negative returns (and many during a bear market or recession).
3. You cannot avoid the bad days and only participate in the good; the best chance of
success is to remain invested in the market, even during periods of high volatility.
As always, we recommend staying balanced, diversified, and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term,improving the chances for investors to reach their goals