The equity markets certainly took investors on a wild ride in the holiday shortened week. On Monday, the Dow Jones Industrial Average lost 650 points; on Wednesday, the markets rallied with the Dow gaining 1086 points, its largest one-day gain in history. On Thursday, extreme volatility drove the Dow down over 600 points before reversing course to close up 260 points. For the week, the major indices posted gains for the first time in December, the Nasdaq rebounded from bear market territory gaining 3.97%; the Russell 2000® Index rose 3.55%; S&P 500® Index rose 2.86% and the Dow gained 2.75%. During the week, the Dow, the S&P 500® and Russell 2000® narrowly missed entering a bear market before the rebound. Year-to-date, though, the Dow, the S&P 500® and Nasdaq are on track to post their first annual losses since 2008.
Analysts suggest that the major culprit in the dramatic selling action is the concern that the global economy is slowing, or that a recession is looming. Later in the week, the rebound seemed driven either by those who bought in an oversold market or discounted fears of an imminent recession. The automated processes of quantitative trading programs, which account for approximately 85% of all trades, are likely responsible for the extreme volatility. Their trading formulas are closely held secrets; and yet, the algorithms that each utilize incorporate price movements and other data. They often move in lockstep as each feeds off the others’ program decisions. Passive investors, which simply follow market momentum, add to the mix. The problem created by the computer models is that they cannot correctly analyze all data events and human behaviors; as a result, their actions may create unintended consequences, including volatility. Active investors must, therefore, adapt to the challenge by utilizing market volatility to advantageously buy and sell stocks. Even so, active investors oftentimes allow the markets to settle down before initiating significant changes.
Following a strong nine months of 2018, the year is ending in disappointment. The markets seemed overwhelmed by myriad events which overshadowed the health of the U.S. economy. Several geopolitical events, including a divided Congress, trade disputes, monetary policies, Brexit, and oil prices will demand attention. By mid-January, the fourth quarter earnings season will provide an important barometer in gauging both the health of the economy and the outlook for the New Year. Many stocks are greatly undervalued; they will recover as headline events reach resolution and earnings reports shed more light on the outlook for individual companies.
Best wishes for a prosperous and Happy New Year!
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.