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October 15, 2018

It’s Been a Tougher Year Than the Headline Suggests

Yesterday’s 3.29% decline in the S&P 500 index was the biggest such move since February. Yet it only put the S&P 500 a mere 4.9% below its record closing high. If it felt like the drop was worse, there are two big reasons why.

The first is the relative headline calm we’ve become accustomed to. Prior to yesterday, the S&P 500 had gone 74 trading days without closing up or down by 1% or more. The large-cap index had also gone 129 days without experiencing a move of 2% or more. Based on these measures, 2018 remains on pace to be less volatile than either 2015 or 2016.
The second reason is that this has been a much tougher year for individual stocks than the headline index numbers suggest. Through Tuesday, the S&P 500 was up 7.73% year to date. Meanwhile, the S&P Equal Weight index has returned just 4.00% over the same period. (Yesterday’s drop knocked down the respective year-to-date returns to 4.19% and 0.99%.)
BlackRock’s chart of the week plotted the performance of the median stock in the S&P 500 (blue bars) against the returns of the index itself (green dot). Though the chart itself is small, the difference in returns is apparent (you can click on the chart to enlarge it). Through October 4, the median stock was underperforming the very index it is a part of by the widest margin in several years.
The same pattern can be seen elsewhere. A simple calculation of year-to-date returns I ran yesterday morning found that slightly more than 40% of S&P 500 stocks were down on a year-to-date basis (even before yesterday’s drop). A little less than half of the S&P 500 stocks were trading above their respective 200-day moving average (a measure of longer-term price trends).
Going beyond the S&P 500, there has been quite a bit of churn. Homebuilding, metal, semiconductor and electronic component maker stocks were all showing signs of good price momentum based on their 26-week relative strength indexes. Since mid-September, transportation stocks have weakened considerably, preceding this week’s notable drop in the Dow Jones transportation average. (Adherents to Dow Theory view such drops as a warning sign of a larger market fall.)
None of this is meant to strike fear or to encourage you to pull out of the market. Rather, I’m simply providing some color on the trends I’ve been noticing. As investors, we can’t choose the market conditions that will exist over our lifetime; we can only choose how we’ll react to them.

There are a few things you can do. First, if you’ve been disappointed with your portfolio’s performance, take a deep breath and realize that it may not be your (or your adviser’s or favorite newsletter writer’s) fault. The process followed is far more important than the actual results. A good, repeatable process greatly increases the odds of achieving the best possible outcome given uncontrollable circumstances. Second, keep your investing time horizon in mind. On a daily, monthly or even yearly basis, the stock market can be very volatile. Over periods of five years or longer, the likelihood of positive returns rises dramatically. Third, ensure that your shorter-term needs for cash flow (aka “liquidity”) are covered. Having these needs met increases your financial ability to tolerate downside volatility. Finally, realize that the less frequently you look at your portfolio and the financial markets, the less volatile they will seem.
The Week Ahead
Monday, October 15, will be the last day you can recharacterize a Roth IRA conversion made in 2017. The Tax Cuts and Jobs Act ended the ability to undo a Roth conversation made after the start of this year.
Mega-cap companies will dominate the earnings calendar, with 46 S&P 500 companies scheduled to report. Included in this group are Dow Jones industrial average components: Goldman Sachs Group Inc. (GS), UnitedHealth Group (UNH) and IBM Corp. (IBM) on Tuesday; and the Travelers Companies Inc. (TRV) and American Express Co. (AXP) on Thursday.
The week’s first economic reports on Monday will be September retail sales, the October Empire State manufacturing survey and August business inventories. Tuesday will feature September industrial production, the October housing market index and the August JOLTS report. The minutes from the most recent Federal Open Market Committee (FOMC) meeting along with September housing starts and building permits will be released on Wednesday. Thursday will feature the October Philadelphia Federal Reserve’s manufacturing business outlook survey. September existing home sales will be released Friday.
Two Federal Reserve officials will be making appearances this week, St. Louis president James Bullard on Wednesday and Atlanta president Raphael Bostic on Friday and Saturday.
The Treasury Department will auction $5 billion of 30-year inflation-protected securities (TIPS) on Thursday.
Courtesy of Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)  
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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