October was a rough month for stock market investors, and November has had a bumpy start. So, what’s going on? And what should you do?
First, take a deep breath. Despite the recent volatility, the market is up for the year.
And October has historically been the most volatile month of the year for stocks, so it’s not unusual to see big swings in the major stock indexes. Analysts at investment research platform Seeking Alpha found that of all the months of the year, October has historically experienced the most 1-percent swings in either direction for the S&P 500 index—and during election years, stocks have finished the month lower, on average.
In fact, the stock market drop on October 31 was attributed in part to new polls showing the gap is narrowing between presidential candidates, with Donald Trump closing in on Hillary Clinton. “Trump, in his own words, is very proud of the fact that he’s unpredictable and likes to do things his own way. And markets do not like unpredictability,” says Joe Heider, founder of Cirrus Wealth Management in Cleveland. Still, he points out that stocks are up for the year.
Why Is This Such a Volatile Time?
Uncertainty around the election is only one factor. Many companies’ earnings were also reported over the last few weeks, and some major companies—like, notably, Apple—fell short of expectations. Since Apple reported its first annual revenue decrease in 15 years last week, its stock has fallen more than 5 percent, which can drag down the S&P index, too.
There have also been questions about when the Federal Reserve, the country’s central bank, will raise what’s called the fed funds rate: the rate at which financial institutions lend money to one another overnight. That rate—currently set at .25 to .5 percent—influences other interest rates, including those banks offer for savings accounts and those you can get charged on credit card balances and loans.
Why Would Interest Rates Affect the Stock Market?
Interest rates can affect stocks because when rates are low, people are more willing to borrow money that they may use to buy products and services, which can help buoy company earnings and stock prices. And for investors who are looking for somewhere to put their money that provides the highest rate of return, stocks can look particularly attractive when returns on other investments are lower.
The central bank’s widely expected to raise rates slightly in December—so analysts say that shouldn’t have much effect on the market—but a move earlier would have caught the market off guard. That’s one reason stocks fell sharply in September after a speech by Federal Reserve Bank of Boston president Eric Rosengren, in which he said “a reasonable case can be made” for tightening interest rates—a statement some investors took to mean that rates could rise in September. (They didn’t.)
The Federal Reserve met again this week to review rates, but opted to leave them unchanged. Stock prices fell during the meeting, but after the bank made the announcement on Wednesday, all three major stock indexes rebounded.
Such short-term volatility isn’t unusual, say analysts, which is why advisors usually recommend investors take a more mid- to long-term view. “There’s a lot of uncertainty out there right now,” says Jon Teran, a Certified Financial Planner with Capstone Pacific Investment Strategies in Covina, Calif.
What Should You Do?
“I say brace yourself. It’s probably going to get a little more volatile” in the days ahead, says Teran. “The important thing is not to have a knee-jerk reaction to the headlines.”
He sees times like this as an opportunity for investors to do a gut check on their risk tolerance. “Make a mental note of how it feels when the market drops because if and when it goes back up, it’s easy to forget that,” he says. If you’re feeling a lot of anxiety when the markets slip, you might consider adjusting your portfolio to one that is more conservative—shifting the ratio so that you’re more invested in “fixed-income” products like bonds, for example, and have less money in stocks.
Generally speaking, though, his advice to clients remains the same: Focus on your long-term goals and don’t pay too much attention to short-term volatility.
Kimberly Foss, a Certified Financial Planner and founder of Empyrion Wealth Management in Roseville, Calif., agrees. The recent volatility “reinforces the importance of focusing on asset allocation and diversification, as opposed to parsing information from news to forecast future market activity,” she says. “Investing is a long-term endeavor: Stay diversified and stay the course.”
This story was updated Nov. 8 to reflect recent market trends.