Another day, another triple-digit move from the Dow.
If you pull up a chart of the Dow from the past few weeks, something interesting happens. In the final eight days of September, you can observe mild market swings every few days. In the first week of October, the frequency and intensity of market fluctuations picked up. And in the past three trading days, we’ve seen the Dow move 200 points or more.
What is causing the increased volatility? There are a few factors at play here.
First, following yesterday’s impressive rebound, high frequency trading (HFT) systems appear to be one source of today’s sharp correction. These HFT systems are oftentimes programmed to “flip a switch” the day after a rally. The market swings we’re witnessing also reveal that there are buyers on dips, while the capitulation days are helping to determine a definitive market bottom. These kinds of market swings are never fun, but the upside is we can outmaneuver the HFT systems by waiting to buy on down days.
Meanwhile, investors continue to be anxious about the same global concerns that sparked the “mini capitulation” day last Wednesday. Germany, an economic powerhouse in the Eurozone, disappointed with its latest trade report. In August, exports sank 5.8%—the largest such drop in five years. As an export-oriented economy, Germany is slowing down, but thanks to the fact that the euro is at the lowest level in 22 months, do not be surprised if the German economy firms up in the coming months. The fact is that a weaker euro makes it more competitive around the world. The bottom line is that trade sanctions against Russia are hurting Germany, but there are some bright spots in Europe’s largest economy.
Sobering statistics out of the Eurozone, Latin America and Japan also caused the International Monetary Fund to lower its global economic outlook. For 2014 the IMF expects 3.3% growth; for 2015 it forecasts 3.8% growth. Earlier, the IMF had been calling for 3.7% growth this year and 3.9% growth next year. Investors sold on the global growth numbers, but I consider this a knee-jerk reaction. That’s because in the same breath, the IMF also raised its U.S. growth estimates. Whereas the IMF previously estimated just 0.5% growth in 2014, it now expects the U.S. economy to grow 2.2% this year. This is due to stronger jobs numbers and a recovering housing market.
The IMF report summarizes the shift that we’re all adjusting to: Emerging economies are slowing down from their previous breakneck pace and the U.S. is becoming the economic oasis of the world. All the while, the geopolitical conflicts surrounding China, Russia, Ukraine, Syria and Iraq are causing plenty of uncertainty, and it’s making investors nervous.
Meanwhile, crude prices have fallen once again on infighting within the OPEC. The glut of crude oil has caused disputes over prices and production quotas between Saudi Arabia, Kuwait and U.A.E. Complicating matters further, Qatar, Saudi Arabia and U.A.E. have all backed different factions in the uprisings that have been unsettling the Middle East.
Unsurprisingly, the chaos in the Middle East and within OPEC has weighed on crude oil prices. Brent crude—the standard for crude oil prices in Europe and OPEC—fell below $90 per barrel for the first time in over two years. West Texas Intermediate (WTI)—the light sweet crude that is a benchmark for U.S. oil—fell to $85.77, the lowest since December 2012. This dragged down the energy sector by 3% during trading today.
There’s no question that these market fluctuations are the source of a lot of heartburn. Some investors continue to be distracted by the doom-and-gloom headlines, and the HFT systems aren’t helping matters. Unfortunately, the market likes to react first, then think second. As long as you’re invested in the fundamentally strongest stocks, you shouldn’t get swept up in these distractions. For those who focus on fundamentals, earnings season is truly the time to shine. I expect this reporting season to spark a flight quality and that volatility will die down as we progress towards the holidays.