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Tuesday, October 5, 2021
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%
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