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Everything is Relative

Today marks the end of September and the end of the third quarter. Investors are less enthusiastic about the economy than earlier in the quarter. Investors are struggling to sort out various issues and concerns, including high inflation expectations, rising interest rates, an economic recovery, timing of Fed tapering, debt ceiling, the stimulus bill, and China’s corporate debt levels.

Stocks ended with one of its worst monthly performances of the year. A sharp selloff in September led to many indexes, sectors, industries, and sectors declining for the quarter.


Attached below are the monthly and the third-quarter performances. A deeper dive into the numbers reveals the following:

On paper, it looks like a terrible month and challenging quarter. Almost all US stock indices sold off sharply into the end of the month. The monthly losses spanned from -2.56% for the S&P 600 Small Cap Index (SML) to -5.73% for the Nasdaq 100 Index (NDX).


For the quarter, stock market indexes fared only slightly better. A few key stock market indexes managed to eke out small gains during the quarter. For example, Nasdaq 100 Index (NDX) gained 0.93% MTD and S&P 500 Index (SPX) climbed 0.23% MTD. However, the rest of the markets faltered poorly into the quarter, including the Dow Jones Industrial Average (INDU – 1.91%), S&P 400 Mid-Cap Index (MID -2.06%), NYSE Composite (NYA – 2.48%), S&P 600 Small-Cap Index (SML -3.14%), and iShares Micro-Cap (IWC - 5.25%).


Since investors are social creatures, they are influenced by human emotions. Traders also tend to have a short attention span, overweighing or focusing exclusively on the most recent information. Their decision-making process is often swayed by the monthly and quarterly statistics.

As you can see from the monthly and third-quarter performance numbers they differ from the year-to-date performances. Since the beginning of the year, almost all US stock markets have returned double-digit gains. For instance, the smaller cap and riskier assets still show impressive returns on a year-to-date basis. Micro-Caps (IWC) have gained 23.48% YTD, and Small-caps are up 20.26% YTD. Benchmark large-cap indexes such as SPX is up 15.58% YTD, and the technology-heavy NDX is also up 14.37% YTD. With one more quarter left until the end of the year, can key market indexes maintain their stellar gains.

Another interesting point worth mentioning – many indexes just recorded all-time highs during the third quarter, suggesting most investors and traders are still holding onto sizeable gains despite the recent sharp September and third quarter setbacks. Also, from a longer-term perspective, drawdowns of the magnitude of 3-5% are typical. They are considered normal consolidations within the confines of primary uptrends.

Over the past year, so many investors have forgotten that stocks can suffer 5% pullbacks and even 10% corrections. Because markets have steadily recorded numerous all-time highs this year without suffering more than 5-6% declines, this has lulled traders and investors into thinking this is the new norm. Yes, the September pullbacks and the third-quarter downturn is unnerving from the context of the most recent trading experience. But it is not that far off based on the historical stock market drawdowns, at least from a longer-term perspective.


The accommodating monetary and the massive fiscal policies may be ending. Interest rates can trend higher, and market volatility may increase in the next quarter. However, trading and investing will always result in winners and losers in an investment portfolio.


Nearly a century ago, Albert Einstein taught us an important lesson - everything is relative. The way you see the world depends on your point of view. What is hot for you may be cold for me. A successful trade for me might be a failure for you. It is not always black or white. We all seek to compare ourselves with others. What matters the most is that it depends on your relative perspective and from your point of view.


Based on everything is relative performances are also relative. An astute and experienced trader or investor will need to continuously reassess one’s risk exposures and tolerance levels amidst a less stable investment climate.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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