Markets posted strong gains last week after struggling for much of October. The S&P 500 had its best weekly performance since May, and the NASDAQ had its first positive week since September. Despite domestic markets dropping on Friday, November 2, the S&P 500 added 2.42%, the Dow increased 2.36%, and the NASDAQ gained 2.65%. International stocks in the MSCI EAFE were also up 3.34%.
Last week did nothing to dispel October’s reputation as a tough month for the markets. The S&P 500 lost 3.94%, the Dow declined 2.97%, and the NASDAQ dropped 3.78% during what was one of 2018’s most volatile weeks so far. All three indexes are down significantly for the month, and both the S&P 500 and Dow have entered negative territory for 2018. International stocks in the MSCI EAFE also struggled, posting a 3.87% drop for the week, and a 13.31% decline for the year.
Why did stocks drop? Will they continue to do so?
Currently, many topics are on investors’ minds, from inflation to tariffs to valuations and beyond, but analysts are not pointing to one single culprit for last week’s performance. Instead, a mixture of concerns, with a large dose of emotion, seemed to drive the markets.
Emotional reactions are understandable when volatility emerges, but they have no place in long-term investment strategies. Instead, we need to focus on the fundamentals.
Stock performance was mixed last week as investors considered the impact of interest rates, international affairs and corporate earnings. The S&P 500 gained 0.02%, and the Dow added 0.41% to post its first weekly gains in October. The NASDAQ declined 0.64% and extended its losing streak. International stocks in the MSCI EAFE dropped by 0.08%.
While the final weekly results showed relatively little growth or loss, the week included some volatility. So far, domestic indexes have struggled this month. As of October 19, the S&P 500 and Dow had each lost more than 3% for the month, and the NASDAQ was down 7%.
As we have often discussed in our market updates, volatility may feel uncomfortable, but market fluctuations are normal. That perspective becomes especially relevant in October, which is considered the most volatile month for markets.
Friday, September 28, was the last trading day in 2018’s 3rd quarter, and the S&P 500 posted its strongest quarterly return in nearly 5 years. The Dow also showed impressive returns by beating expectations for the quarter, while the NASDAQ notched record highs against 2017 numbers. For the quarter, the S&P jumped 7.2%, the Dow increased 9.3%, and the NASDAQ moved up 7.1%.
As we learn more about the 3rd quarter, some details from last week offer perspectives on where we stand today.
Domestic markets fell last week due to negative trade news and declining tech stocks, with the S&P 500 and Dow both breaking their multi-week winning streaks. Meanwhile, the NASDAQ posted losses for 4 days in a row for the first time since April and experienced its worst September start since 2008. Overall, the S&P 500 lost 1.03%, the Dow dropped 0.19%, and the NASDAQ gave back 2.55% for the week. International stocks in the MSCI EAFE also declined, losing 2.89%.
The Cboe Volatility Index (VIX), which can help gauge market fears, increased 15.8% last week. This increase matches what often occurs during September, when volatility returns after waning during the summer months. In fact, since 2007, volatility has been above average in September.
Of course, the change from one month or season to another isn’t enough to trigger market losses and rising volatility. Let’s analyze what drove these experiences last week.