Volatility Is Back

By Nicholas Jasinski | Tuesday, October 5

Rough Sailing. Stock indexes seesawed again today, rising strongly after Monday's steep drop. Volatility is back.

Congressional drama over infrastructure funding, social and climate spending, future tax rates, the debt ceiling (more on that below), the implications of the Federal Reserve's upcoming bond-purchase tapering, and a flood of economic and earnings data over the coming weeks has uncertainty levels running high. That's not to mention potential wildcards from Covid-19 and inflation, or something else entirely.

One-percent daily moves in either direction have been commonplace in recent weeks, and measures of expected future volatility remain elevated from a month ago. Today, the S&P 500 rose 1.1%, the Dow Jones Industrial Average added 0.9%, and the Nasdaq Composite jumped 1.3%. Big Tech stocks including Facebook, Apple, and Amazon.com bounced back from yesterday's losses.

Those risks to the market and the economy remain just as real today as they were yesterday, when all three indexes fell at least 0.9%. But after recent declines, a buy-the-dip mentality may be setting in. 

Market technicians noted this morning that the S&P 500 was looking oversold, at more than two standard deviations below its 50-day moving average for the first time in 384 trading days.

Such a pullback can be healthy for bull markets in the long run, strategists tend to say, because it allows for earnings to catch up, attracts new buyers at lower prices, and enables pockets of excess to deflate.

"Although challenges remain, we view the September setback as providing a sharp and welcome reset to sentiment, positioning, and valuations that should ultimately lay the foundation for the bull market to extend," wrote Keith Lerner, co-CIO at Truist Advisory Services, today. "Overall, we remain positive but realistic about the outlook."

By "positive," Lerner is referring to a solid economic backdrop and post-pandemic global recovery still ahead. That's bullish for most companies in most countries. But by "realistic," he means that the stock market doesn't usually behave the way it has for most of the past 18 months. That is, such a long streak of gains without a meaningful pullback or pause in the rally is more of an exception than the rule.

While the near term may remain mighty bumpy, there are still reasons to be optimistic about stock returns over a longer time horizon. After recent declines, the S&P 500 is the cheapest it has been on a forward price-to-earnings ratio basis since May 2020, per Lerner. That could be a sign of more pessimism than the situation justifies.

Lerner recommends leaning into the recently beaten-down and more economically-sensitive areas of the market, including the financial and energy sectors and small caps.

DJIA: +0.92% to 34,314.67
S&P 500: +1.05% to 4,345.72
Nasdaq: +1.25% to 14,433.83

The Hot Stock: Abiomed +5.9%
The Biggest Loser: Ventas -3.7%

Best Sector: Financials +2%
Worst Sectors: Real Estate -0.8%