Stock Market Volatility Feeding on Itself

October 23, 2018
1164 Views

If you’re an investor, then you’ve probably been watching the stock market closely this month. High levels of volatility and record single-day slides have occurred. October is traditionally one of the worst months of the year for investors, and 2018 is no exception.

However, volatility is not based on the underlying strength of equities and is instead feeding off itself. Some analysts believe that stocks will rally again at the end of the year, so this month may not be leading to the heavy market losses that investors fear.

Investors Sell When Stock Market Drop in Value

Investors who are in stocks for the long term are more focused on dividends and real company performance. Short term traders, and even short sellers, rely more on swift value changes that can bring them a profit.

The slide in prices earlier this month set off a volatile trend. Much of this volatility is caused by short term investors who get nervous when prices start slipping. There’s a compounding effect and we can witness this with large single-day slides.

Investors with short term mindsets are also more likely to buy new stocks while prices are down, which can then lead to rapid upturns, and we have also seen some strong single-day growth this month.

Although this is only a basic overview of the stock market (there are myriad factors that lead to price changes), it can at least explain some of the volatility.

The good news is that while prices are relatively low today, they are not reflective of the strength of the companies they belong to.

Key Indicators for Markets are Positive

Stock prices alone do not suggest the strength of the market. Credit Suisse analysts reported earlier this week that 76% of the companies to already report third quarter growth have surpassed estimates. Earnings-per-share (EPS) for these companies is up an average of 3.9%.

Certificates of deposit (CDs) are still strong with interest rates stable. These investment products are not directly linked to the stock market but the banks that underwrite them are. If the stock market were in such a dire state, then CD returns would be far worse.

International currency performance is also stable, excluding the British Pound (GBP) which is suffering from Brexit uncertainty.

If you are concerned about stock trades this month then you’re a smart investor. There are opportunities to buy strong stocks at lower prices, but overall, your activity this month should be cautious. Keep in mind that February had similar levels of volatility, which was then followed by record growth throughout the second and third quarter. Some analysts expect a similar rebound at the end of this year.

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