What should you make of stocks’ ugly October – and what to do about it? The answer lies outside America. Fathom global markets, and you’ll fathom why good times lie ahead.
Whenever volatility hits, ask: Is this a correction or bear market? Corrections are short, ugly drops of about 10 percent to 20 percent. They begin and end for any or no reason, fueled by false fears and scary stories – but not real trouble. Some years there are none. Others there are one or two – yet they can still be great years for stocks. Trying to avoid corrections is nearly impossible as an investor.
Bear markets are deeper, characterized by 12 to 24 months of painful grinding, stocks falling 20 percent to 50 percent or so, and deep, ugly recessions. Avoiding bears is worthwhile.
What U.S. stocks experienced earlier this year was a wintertime mini-correction. Then they reached new highs. Since October, we’ve almost had another correction.
World stocks, though, had a full-scale correction, driven by emerging markets and Europe, which look like corrective train wrecks.
Overseas investors are fretting over endless phantoms, like Brexit. How will it work, they ask? Will it be a hard break, with trade dislocations? We’ll know by March, but investors hate uncertainty.
They also imagine Italy’s populist government will cause a disastrous debt crisis, destroying the euro. They can’t measure correctly that Italy’s finances are at their healthiest in a generation. Many wrongly fear the European Central Bank’s December plan to end quantitative easing (QE) will cripple Europe’s growth. They can’t understand why ending it is very good. Many also fear EU politics will explode without Angela Merkel heading Germany. Her political swan dive, driven by immigration fears, shook European politicos. Immigration rattles folks there – actually much, much more than our American version does here.
Meanwhile, Asia investors are worried about China, tariff jitters, Australia’s bank investigations and unstable governments. Many fear that a strong dollar renders financing impossible for emerging markets businesses. Deflation dread and weak GDP stalk Japan.
All are basically false fears, yet ones that feed off each other in the foreign investor psyche.
Put it all together, and what do you get? Foreign stocks, using the MSCI EAFE (Europe, Australasia, Far East), were down 16.7 percent at their low in October. Emerging markets were down 25 percent at their worst point last month. But the best gauge is MSCI’s All Country World Index (ACWI) – all emerging and developed markets, including America. It was down 12.6 percent in October, a moderate global correction.
Some countries did better, some worse. China, Germany, Spain and some others breached a 20 percent – technically bear markets. So did the materials sector, as did many individual hard-luck stocks. But dwelling on bear markets in small categories and extrapolating them is a mistake. Even in super-great times, some narrow categories and stocks are down big. If you’re diversified, it doesn’t matter – the totality of global markets is really the right guide.
What really matters? Having had a correction, the MSCI ACWI is primed and ready to bounce. Correction recoveries are usually V-shaped – fast and high.
There is also the “87 Percent Miracle” of post-midterm returns discussed in my June 3 column.
Not only are the midterm-year fourth quarter and following two quarters each positive 87 percent of the time, the whole nine-month stretch is positive 91 percent of the time.
A yucky October doesn’t change this. Eight other times, a midterm-year October was negative. Yet the full nine-month stretch was positive seven of those. With midterms rendering more gridlock, autumn swings should be short-lived. Also good: Major global leading economic indexes are high and rising – almost everywhere. European QE ending is, in fact, a positive bonus.
A negative October is all the more reason to get going with positiveness. Don’t let fear sidetrack you. Own stocks and hang on.