Tuesday, October 14, 2014

why is the stock market acting so crazy?

It’s not your imagination: the stock market has gone a little bonkers lately. This week alone the Dow Jones Industrial Average (^DJI) plummeted 272 points on Tuesday, rocketed back 274 points Wednesday and sank more than 330 points today. October has already recorded five days where stocks moved more than 1%. That’s as many 1% moves as we saw in the prior five months combined.

So why are stocks so crazy? There’s no set answer but here are three of the most obvious explanations making the rounds on Wall Street.

It’s October

I know it sounds crazy but October is almost by tradition the most volatile month of the year. Whether it’s because of the upcoming holidays, the end of the fiscal year for mutual funds or because we hold elections every other November, October sees far and away the most 1% moves of any month. Remarkably since 1970 nearly one third of every trading day in October has seen the price of stocks change by 1% or more. It's also worth noting that historically bad days like the 1929 crash and 1987's Black Monday crash both took place in October.

Global concerns
The world is always crazy but right now things seem to be rockier than normal. Government officials in Europe are arguing over the best way to ward off an impending recession, growth is slowing to a relative crawl in China and Japan is tipping into a recession. That’s never good for companies driven by exports like General Motors (GM) or McDonalds (MCD).

For their part the Federal Reserve acknowledged these global concerns yesterday and suggested they would be very cautious about raising interest rates because of such worries. That sentiment sent stocks surging, just the latest bit of evidence that investors pay very close attention to every word uttered by the Federal Reserve.

Bad news outbreak

It’s not just overseas. The Ebola outbreak has some investors worried that the U.S. economy, which hasn’t been great to begin with, could freeze. Despite good headline data on employment many economists point out that wage growth in the U.S. has been almost non-existent. The fear may be overblown but this time of year traders tend to sell first and ask questions later.

So what should you do? Probably nothing. If you’re like most investors you’re not looking at your portfolio more than once a month unless or until you see bold headlines about stocks plunging. That can make the prospect of opening up those statements pretty daunting.

The truth is trying to time the market is always a sucker’s game and that’s especially true during volatile times. Days like this aren’t a good time to radically change your long-term strategy.

Professional traders would love to see you panic into dumping some quality blue chips. Don’t be that person. Take a long-term view and if you’re in doubt make an appointment to meet with your financial planner.

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