As I began writing this last week, the headlines were pretty sensational lately, trumpeting the S&P 500’s 9-day losing streak through last Friday. This has been the longest such stretch since 1980… the longest in 36 years!!
There’s a difference, however, between a long losing streak and a bad losing streak. Despite the length of the current stretch, the S&P 500 was down about 3% over those nine trading days. The 1980 streak was down over 9% in the same period, and the prior 8-day losing streak during the financial crisis was down 23%. To put things in perspective, we’ve seen losses of more than 3% in a single day, so the current 3% loss over an extended period really isn’t that concerning.
So what’s the cause of the current losing streak? We believe it to be emails. It was largely anticipated that Hilary Clinton was going to run away with the US presidential election until FBI Director James Comey found himself in the awkward position of informing Congress that the investigation into Clinton’s private email server required reopening due to the discovery of additional emails. This revelation caused what appeared to be a sure thing to become suddenly uncertain.
The stock market trades in anticipation of events. When traders anticipate certainty, they can be comfortable pushing the market up on that certainty. But when uncertainty and unknown enter the picture, the market tends to be unsettled. Aside from the current losing streak, the most recent example of this was the Brexit vote. Traders expected a benign vote to remain in the EU, so when the unexpected occurred, the market reacted viscerally.
The Brexit vote is a good example, too, of how people tend to overreact to the unexpected. The S&P 500 fell 5.3% in the two days following the Brexit vote, only to recover relatively quickly and exceed its pre-vote levels.
Sure enough, Director Comey announced over the weekend that no new evidence was found to warrant charges against Clinton. The market’s reaction confirms the above outlined suspicion that the recent downward movement was in reaction to uncertainty. As of this writing, the S&P 500 is up over 2% for the morning, clearly signaling that traders have regained a sense of certainty in this election… we’ll see how the day wraps up.
While there remains an election tomorrow, and polls indicate the election has gotten much closer over the last two weeks, the fact that the election is coming to an end should provide clarity and relief, or at least diminishing uncertainty. The market will no longer have to guess as to who might be elected, and companies will be able to position themselves in anticipation of the incoming administration’s policies.
The removal of uncertainty has historically proven positive for the stock market. Today’s likely end of the S&P’s losing streak again confirms this.
– Barry Nelson