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October Spooks Market Uncertainty

October continues to follow some historical, seasonal trends. Historically, October is not the weakest month for the markets, but has traditionally been the most volatile. The daily standard deviation (degree of fluctuation) of trading days in October is 30-40% more than the average month. The month that features Halloween seems to also be a “spooky” month for the markets.


The markets have generally continued the declining “stair-step” pattern that began in early August. The S&P 500 has seen a short-term pattern of lower highs and lower lows. Each small rally in the markets has been short-lived, before seeing some downside pressure.


Right now, the average investor are conflicted on which direction the markets will ultimately go. In the past, we have discussed the AAII Investor Sentiment Survey. The survey gauges the feelings and emotions of investors by surveying them on where they see the markets in the next 6 months and whether they are bullish, bearish, or neutral. The survey results are viewed as a “contrarian” indicator, meaning that investors feel most optimistic at market peaks and most pessimistic at market troughs.


Right now, investors are undecided on the markets, with 34% of survey respondents indicating that they are bullish, 35% indicating that they are bearish, and 31% are neutral.


A Few Points on the Current Market Environment


Investors might be “uncertain” on where the markets will go from here, but it should be understood that markets are always uncertain. No one knows where they will go in the future. All you can do is assess the current market climate and the level of risk. Here are a few bullet points on the current state of the markets.


· The largest seven S&P 500 stocks (Apple, Microsoft, Google, Nvidia, Meta, Tesla, and Amazon) have been, by far, some of the best performers in 2023. As a collective, these seven stocks are up 54% on the year. These same seven stocks were some of the market’s worst performers in 2022, with the median of these stocks down -50%. As a group, they are still a ways away from a new high.


· The S&P 500 is a capitalization-weighted index. Those seven large stocks account for 25% of the index’s fluctuations. If you removed those seven stocks from the index, the remaining cap-weighted S&P 500 would be down -1% for the year. As a matter of fact, the equal-weighted S&P 500 is down -3% on the year. In other words, the average S&P 500 stock is down -3% in 2023.


· Small cap stocks have nearly matched their lows. This year, the Russell 2000 is down -5%. From its recent July 31 peak, the index is down -16%.


· Only four out of the eleven S&P 500 sectors are up for the year. Those are information technology, communications, consumer discretionary, and Energy. “Defensive” sectors like Consumer Staples, Utilities, and Real Estate are each down between -9% and -17%.


· With interest rates up, 20-year treasuries have fallen -17%, and a basket of 7-10 year treasury notes is down -7%. Bonds continue the steep decline that they began in August 2020.


Bottom Line

It is risky for most investors to hold just the S&P 500. The S&P 500 is clearly unbalanced and heavily favors just seven stocks. While those seven stocks have performed well in 2023, the majority of stocks have not. Small cap company stocks have seen increased volatility. On the other hand, bonds have not been very defensive either.


Right now, according to Canterbury’s research, many “inverse” ETFs are rising up our lists. Some of these inverse securities would include inverse small caps, inverse real estate, and inverse emerging markets. This indicates that there are rising risks in today’s market.


The Portfolio Thermostat continues to make adjustments to account for some of these rising risks. Recently, the portfolio has been successful in reducing volatility throughout the decline of the last few months. As market environments continue to change, the Portfolio Thermostat will continue to make adjustments to move in concert with changing environments- bull or bear.


*Disclaimer: Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.


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