By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®
October has a reputation for being the worst month of the year for investors. Some of the biggest market crashes have hit in October -- The Bank Panic of October 1907, Black Tuesday (October 1929), Black Monday (October 1987), and the darkest days of the global financial crisis (October 2008) when Lehman Brothers went under and AIG almost did. But research shows October is not the worst performing month of the year (September has that honor); it’s simply the most volatile month. As we’ll explain in a minute, volatility is not necessarily bad. But uncertainty is what’s driving the markets right now whether it’s concern over inflation, the war in Ukraine or how far will the Fed go with rate hikes.
Silver lining to the high rate/high inflation storm clouds
How bad is inflation really? In talking with many of you, there seems to be two camps:
1) Those who think inflation is still a huge problem and the Fed is doing the right thing, and
2) Those who think the Fed is overdoing it and will be forced to reduce rates drastically in the future.
No one knows for sure. But rising rates aren’t all doom and gloom. For instance, 6-month Treasurys are yielding over 4%. While this sharp increase in rates is painful for those who own fixed income, the pain will be made up in very short time by the increase in yields. Retirees, near-retirees, and others with lower risk tolerance are finally getting some relief. The strong U.S. dollar (another unintended consequence of the Fed’s aggressive policies) makes now an excellent time to travel abroad or to purchase imported cars or luxury goods you’ve had your eye on. And the current bear market has created an opportune time to harvest losses and rebalance your portfolio – something we do all year-round for our clients.
That being said, the Fed is almost certain to raise interest rates at its next meeting after this week’s (Oct. 13) Core Inflation numbers revealed that inflation remains stubbornly high. But sharp volatility doesn’t necessarily mean losses for investors. Regardless, our clients know that occasional market corrections and high volatility are already baked into their long-term financial plans.
But the near-term could be a bumpy ride. According to research from LPL Financial, there have been more 1% or larger daily swings in the S&P 500 during October than in any other month of the year. Over the last 30-plus years, the Chicago Board Options Exchange's CBOE Volatility Index (aka The VIX or the “Fear Gauge”), has been higher/more volatile in October than any other month (see chart below). And that’s in a normal year.
The peaks and troughs in 2022 and early 2023 could be more pronounced than usual, but don’t let anyone tell you: “this time it’s different.” As always, a well-diversified long-term plan always wins out in the long run. As the old saying goes: “Time in the market always beats trying to time the market.”
For instance, even with a nearly 18% drop in value over the past 12 months (through Sep. 30), U.S. stocks are still generating hefty, annualized returns of 8.62% a year over the past five years and 11.39% a year over the past 10 years, far surpassing global real estate and international stocks.
Major Headlines for Q3
“Fed Raises Interest Rates by 0.75 of a Percentage Point for Third Straight Meeting.”
“Biden Signs Bill Aimed at Lowering Drug Costs, Boosting Renewable Energy.”
“US Home Sales Dropped in July for Sixth Straight Month.”
“Mortgage Rates Top 6% for the First Time since the 2008 Financial Crisis.”
“ECB Raises Interest Rates by Historic 0.75 of a Point as Europe Stares at Recession.”
“Queen Elizabeth II Dies” and “Liz Truss Is Appointed UK Prime Minister.”
“Freight Railroads, Unions Reach Deal to Avert Strike.”
Conclusion
Again, a well-constructed financial plan assumes market corrections and outsize volatility will occur from time to time. We hope you’re staying safe and healthy. Again. If you have a question or just want to review your performance, please contact us HERE to schedule a quick meeting with either Mike or Ryan.
