What have we learned since Friday? The market needs an identity.
On Friday, I wrote that I thought the market was acting irrationally. The next couple days have been further evidence that the market is struggling to figure out its identity.
On Monday, we were greeted with an increase of more than 11% or 900 points on the DOW and everyone was relieved (I would have been happy with a increase of 300 points and thought the 900 point increase portended more volatility). Tuesday was relatively quiet. And today, as many have seen, the DOW declined almost 8% or more than 700 points.
I, like many of you, have felt a bit of whiplash lately. I couldn’t remember a time when we had this much volatility on a day-to-day basis so I went back and did some digging. Here’s what I found.
In the eleven (11) trading days we’ve had in October the smallest point swing in the DOW, from intraday high to intraday low, has been 475 points. The average daily swing in October has been more than 800 points.
To put this in perspective, over the last five years, 1259 trading days, we’ve had only twenty-one (21) days where the point swing was equal to or greater than the smallest we’ve experienced in October. In fact the average point swing was only about a quarter (25%) of what we’ve experienced lately.
So what does it all mean?
In my opinion, the market continues to follow a herd mentality. Whichever way the leader points, the herd goes. Either euphoria reigns like it did on Monday, or panic reigns like it did today. I am not discounting the effect of the ongoing turmoil in with financial institutions or the economic weakness that we are seeing. I am however saying that this is nothing new. The market has had time to reflect on a slowing economy as well as the time to adjust itself to a slowing economy for the last several months.
On the positive side, we’ve seen further action by a number of government’s worldwide. Several, including the U.S., are investing directly into weakened financial institutions in order to shore up their capital structures and promote a loosening of the credit markets. With time, these actions will work through the market and begin to free up the capital that businesses need to operate and grow.
In addition, oil closed today below $75/barrel, almost 50% below its peak in July, which will result in more money in everyone’s pocket.
What I’d like you to take away from this post is that I expect continued market volatility, however irrational it may be. But I also continue to believe that this is a long-term buying opportunity. The market and the economy have proven their resilience time and time again. I believe this will again be the case and think we will look back on this time and realize that it was a good time to be a long-term investor.
Scott H
P.S. For those of you who haven’t joined the 1% challenge and taken advantage of the discount, I encourage you to do so today. To learn more about the challenge, click here.
