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.


©2018 Edelman Financial Engines. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.