(Bloomberg) U.S. President Donald Trump’s positive coronavirus test stirred up more turbulence in stocks, two days into a month infamous for its volatility.
Markets around the world fell after Trump tweeted about his test, and the VIX — a volatility index known as Wall Street’s fear gauge — jumped on Friday by the most in a month before paring gains. Even after closing down nearly 1% following a volatile day of trading on Friday, the S&P 500 posted gains of 1.5% for the week.
It’s unclear what path Trump’s illness will take, and the uncertainty will only further unnerve already-jittery investors. People tend to underestimate their risk tolerance when times are good, and may be tempted to move money into cash piles that are already high.
Trying to time the market often doesn’t turn out well. Spooked retail investors wind up selling at lows, after buying at highs. They then face another decision — when to buy back in — and wind up sitting on cash and missing out on market gains. Take March, when the S&P 500 plunged 34% in a matter of weeks. Anyone who sold at the bottom on March 23 missed out on a 16% rally by the end of the month.
“Almost all of our clients understand not to react to events but to focus more on the longer term,” said Artie Green, a certified financial planner with Cognizant Wealth Advisors in Palo Alto. “If the market were to drop precipitously we’d send out an email reinforcing the above.”
While Octobers can be volatile for stock markets, they don’t always end on a down note. The performance tends to look more like a checkmark — starting with a decline and then ending higher than where the market started.
But the month has higher highs and deeper lows than any other, said Sam Stovall, the chief investment strategist at research firm CFRA.
Black Monday and Black Tuesday were both in October: Oct. 19, 1987, and Oct. 29, 1929. In many years, October is the run-up to significant U.S. elections, and the month in 2018 was particularly bumpy. “It’s a month teeming with uncertainty,” Stovall said.
But there are more mundane reasons for the volatility. Often, mutual fund managers want to lock in gains in October, when their fiscal years end, to make sure their performance looks good, Stovall said.
Some institutions start to reposition their portfolios in October after their September strategy meetings wrap up, said Chris Brightman, chief investment officer for Research Affiliates. “If many investors try to move in the same direction at same time, it can create a significant correction,” he said.
Presidential health shocks can cause big downdrafts, but most wind up being non-events in terms of market performance. Stovall looked at presidential health events, including Woodrow Wilson’s stroke in October 1919, and found that in most cases, the market recovered in a day or two.
