Volatility returns to the stock market.

Back in September, the S&P 500 didn’t move by more than 1% on any given day. But during October, the S&P 500 gained or lost more than 1% on 10 of the trading days in the month. Read more to find out why volatility returned to the stock market during October and what it may mean for you.

What happened.

After reaching new all-time highs in September, the stock market pulled back in October. Volatility returned to most markets, similar to the episode that unfolded earlier this year. Stocks and bonds, at home and abroad, generally ended lower for the month, but a rally at the end of the month helped to ease some of the uncertainty.

Large cap stocks, represented by the S&P 500, dropped 6.84%. The MSCI EAFE Index, which tracks developed market international stocks, dropped 7.96%. The bond market experienced some bumps, too, as the Bloomberg Barclays Aggregate Bond Index fell by 0.79%.

The historically riskier investments like U.S. small-cap and emerging-market stocks experienced some of the most extreme volatility during the month. The U.S. small-cap S&P 600 fell by 10.48% and emerging-market stocks, as defined by the MSCI Emerging Markets Index, dropped by 8.71%.

This past month was similar to the phase that the stock market went through back in February and March. While both periods saw the stock market trend lower, the nature of the day-to-day gyrations were extreme. The S&P 500, for instance, moved up or down by more than 1% on 10 out of the 23 trading days in October

Why it happened.

Trying to understand the specific causes of short-term fluctuations is often an exercise in futility. But in October, there seemed to be two major stories that may have influenced markets.

Ongoing worries about trade tensions with China, and the impact this conflict might have on economics and corporate profits, might have been one of the main drivers of volatility in October. The impact of the trade tensions on corporate profits came into focus this past month as companies began reporting financial results for the third-quarter.

Generally, corporate earnings reports were positive with many companies exceeding expectations. But some major firms, such as Amazon and Caterpillar, reported disappointing revenues and, perhaps more importantly, lowered expectations for the coming quarter. Part of this might have been attributed to the escalating trade tensions between the U.S. and China.

A second story that might have contributed to volatility during the month was the continued rise in interest rates. The U.S. economy grew by +3.5% in the third quarter, but this strong growth contributed to concerns about the Federal Reserve raising interest. The worry is the Fed could raise rates faster than had been previously expected.

Volatile phases in the markets, like this last month, can feel unsettling. During these stretches, it can be helpful to keep your sights set on your long-term goals and to remember that risk is part of investing.

It might also be helpful to remember that just a few months ago, the market reached a new all-time high. Of course, this was during the recovery through the summer, after the last stretch of volatility this past spring. In this month’s sidebar, we offer some perspective on dealing with volatile markets.

What this means for you.

It’s likely that your portfolio experienced a negative return in October. If you’re worried or feeling anxious about your portfolio, now might be a good time to revisit your risk tolerance. This is a measure of how comfortable you are with the risk in your portfolio.

If you don’t know what your risk tolerance is, we can help you determine your comfort level and build a personalized portfolio from the investment options in your employer’s 401(k) retirement plan. Along with finding a comfortable risk level, we can consider when you want to retire and with how much, along with other information that you provide about your situation.

The more you can share about what you want to achieve, the better we can help with a personalized financial plan to help you reach your goals. Please log into your Financial Engines account or call one of our planners to make sure we have the information we need to help you stay on track and find a risk tolerance that you’re comfortable with.

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