5 REASONS WHY BIG STOCK PRICE SWINGS ARE BACK
The market roller coaster is back. After two months of market calm, Wall Street is again experiencing “volatility” — code word for prices gyrating up and down in sizable increments. Consider the trading pattern of the Dow Jones industrial average the past three sessions: It fell 250 points Tuesday after a 240-point gain Monday and a nearly 400-point drop Friday. Add to that a drop in the price of oil spurred by a
1. THE CALM BEFORE THE STORM
Like milk, low-volatility periods in the market have expiration dates. The Standard & Poor’s 500 index went up virtually in a straight line after the Brexit selloff ’s low in late June, gaining nearly 9% in seven weeks before notching a record of 2,190.15 on Aug. 15.
That type of run can’t last forever. The return of big price swings shouldn’t come as a surprise to investors, says Ann Miletti, lead portfolio manager at Wells Fargo Funds. What was unusual, she says, was the S&P 500 going two months without suffering a drop of 1% or more. “That was the real surprise,” Miletti says.
2. RATE HIKE FEARS A key driver of higher stock prices has been low interest rates. In recent weeks, a spate of Federal Reserve officials built a case for raising borrowing costs for the first time this year, perhaps as early as next week’s Fed meeting. That spooked Wall Street, which wasn’t expecting a rate increase until December.
There’s a growing feeling that the Fed — and other central banks — will be less supportive of financial markets.
“Central bank policy might not be as large a tailwind for stocks going forward,” says Bill Hornbarger, chief investment strategist at Moneta Group. report that the demand for oil is slowing. The U.S. benchmark fell nearly 3% on the news.
It’s a reality check for investors who had been lulled into complacency, says Brian Belski, chief invesment strategist at BMO Capital Markets.
Many market risks are piling up all at once, ranging from fears that rising interest rates could remove a key pillar of support for stocks to an overvalued market to the presidential election.
“Lots of reality facing investors, considering the election and Fed,” says Belski.
Five factors driving the market’s wild ride:
3. SEASONAL HEADWINDS
“Stocks have entered a seasonally weak period,” says Bruce Bittles, chief investment strategist at Baird. How weak? In the past 50 years, September has been the worst-performing month for the Dow. And October has a nasty reputation, thanks to stock market crashes in 1929 and 1987.
4. POLITICAL ANGST
“Election noise is a catalyst for volatility,” Belski says. Wall Street hates uncertainty. And with the election outcome still unknown as Hillary Clinton and Donald Trump campaign for votes, stocks will periodically suffer “shortterm bouts” of selling.
5. STOCKS AREN’T CHEAP
The S&P 500’s current valuation — based on its price-to-earnings ratio — is higher than its historical average. It’s trading at more than 17 times its estimated earnings over the next four quarters, above its long-term average of 14.7. A “richly” priced market, Bittles says, is more vulnerable to selling when investors get spooked.
Bill Stone, chief investment strategist at PNC Asset Management, says investors fear the Fed will hike rates too quickly for the economy to withstand.
AUG. 31: 18,400.88 SEPT. 8: 18,479.91 SEPT. 13: 18,066.75