Two-thirds of the way through 2020 and the market has gone from ending its longest bull run ever to experiencing one of the most significant recession-driven sell-offs in history to retaking new all-time highs. All this in a matter of eight months.
Now, with the pandemic locked in for at least another year and stocks entering what is historically their most volatile annual period, traders should be wary of the trends that have characterized fall markets in the past.
Trading Research platform VantagePoint will be hosting a live demo using its predictive A.I. to look at some of the stocks traders and analysts are focusing on heading into the final months of 2020. For now, we’ll examine some ongoing trends in the market and explore how previous bouts of year-end volatility might reflect on current market leaders.
Common market wisdom holds that, following a summer lull in which retail and prop traders alike take a break from the market, autumn markets tend to be more reactive as traders re-enter the market and position themselves for the end of the year.
While this idea has become somewhat outmoded (with some even debating whether the “Sell in May…” mantra was ever true) there is a good deal of historical data showing that volatility does pick up through September, October and November.
Some of this can be chalked up to impactful market events that took place around this time, like 2011’s “Black Monday” in which the market sold off after the U.S. received a downgrade to its credit rating from Standard and Poor’s, or 2018’s crash that came in the midst of fiscal tightening measures from the Federal Reserve.
Reaction 2011’s Recession Fears
Looking at the ”Black Monday” event we can draw some parallels to today’s market, most notably the fear of a global recession. While the sell-off in late 2011 was due to a combination of factors, including the U.S. credit downgrade and continued financial struggles in the Eurozone, the larger fears of a global slowdown aren’t entirely different from similar economic fears related to the effects of the pandemic.
At that time, financial stocks like those represented in the Financial Select Sector SPDR Fund (NYSE:XLF) did take a hit as a result of global recessionary fears at the time, though the sector was still reeling from the 2008 housing market collapse. However, more relevant is what happened to industrial-sector stocks like Caterpillar Inc. (NYSE:CAT), General Motors Co. (NYSE:GE) and Honeywell International, Inc. (NYSE:HON), each of which found new 52-week lows through September and October of that year as a result of recession fears.
The current market environment is certainly acting cautiously toward both the financial and industrial sectors. JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corporation (NYSE:BAC) are both still below their most recent highs, though the industrial named listed above have had more of a resurgence through the summer, something that may prove detrimental if recessionary fears pick up again into the fourth quarter.
The 2018 Crash
OIn more recent history, the 2018 crash occurred as a result of many influences the market is still processing today, including an ongoing trade war between the U.S. and China and the possibility of a global recession. Of course, the market was also responding to increases to the Federal funds rate, something traders saw as an attack on equity markets.
The fallout from that crash landed primarily on the shoulders of consumer and tech stocks. The most obvious bellwether of that crash was Amazon.com, Inc. (NASDAQ:AMZN), which lost more than 25% of its equity in 2018’s final quarter. Other high-flyers, like Apple Inc. (NASDAQ:AAPL) and Nvidia Corporation (NASDAQ:NVDA) shed a good chunk of their annual gains as well.
However, traders today know how those stories progressed since then. Many might remember 2018’s crash as the buying opportunity of the past decade. That might also explain why those high-flying tech stocks have been so resilient in the current market environment, though that’s no guarantee traders will be able to stomach how those charts react as autumn sets in and the next stage of the pandemic takes hold.