It was painful for investors to open their September 30 quarterly statements and see the results of the summer market declines. And the slide continued on October 3, the first trading day of the month, as the S&P 500 Index closed at 1,099 – one bad day away from falling into bear market territory (a 20 percent decline from its prior peak).
Then the unexpected happened: the tide turned midday on October 4 and stocks enjoyed an almost uninterrupted four-week rally. Despite a 2.5 percent Halloween decline to closeout October, the S&P 500 still rose 10.8 percent for the month – its best month since December 1991!
Why the sudden turnaround? This summer the European debt crisis looked intractable and the U.S. economy appeared to be at risk of falling into another recession. During October European leaders finally began treating the crisis seriously and have made progress in addressing it. Meanwhile, economic growth in the U.S. has been solid: Gross Domestic Product showed a 2.5 percent increase for the third quarter, up from 1.5 percent in the second quarter.
Despite these improvements, the market anxiety of yesterday and today certainly reminds us that worries still abound. However, a very rewarding October also serves as a healthy reminder: only investors adhering to a disciplined rebalancing strategy fully captured the market’s best month in two decades.
Throughout the summer and into early October, we have been diligently rebalancing client portfolios as stock market declines provided buying opportunities. Of course, we have no way of knowing when the discipline of this activity will be rewarded, but history and experience tells us it will be rewarded. October simply reinforced this.