As we noted, in our Observation from September 26th, " October May Be a Bumpy Ride," the month of October has a reputation for volatility. And last week did not disappoint. By last Thursday, the S&P 500 Index had fallen for six consecutive sessions, its longest losing streak in nearly two years. And the volatility index (see VIX index chart below) spiked +76% last week. A combination of factors led to the sell-off including fears of an overheating US economy, an uptick in US/China trade tensions, Chinese economic deceleration, negative effects of tariffs on corporate earnings, perception of aggressive Federal Reserve rate hikes, and elevated equity valuations. As if that wasn't enough, investors are also weighing factors like t he benchmark 10-year Treasury yield hitting 3.25% for the first time since 2011, nervousness over the upcoming midterm elections, and worries about whether corporate earnings may have already reached the peak of this business cycle.

But upon closer inspection, it appears this might be a normal pocket of volatility rather than the beginning of a bear market. As you can see in the chart to the right, market swings of 1% or more are not uncommon. On average, they occur 62 times a year. At nearly 10 months into the year, we're well behind that average with just 39 days of 1% price moves.

While investors do have a lot to consider, the fundamentals that have driven this bull market did not simply evaporate last week. Inflation still looks contained, (CPI rose just one-tenth of a percent and PPI rose two-tenths of a percent last month), the Chinese government has recently implemented a variety of stimulus measures to combat an economic slowdown, new tariffs still look like they can be absorbed by US companies, interest rates are still rising slowly by historical comparison, and US equity valuations are now marginally below average. 

Of course, only time will tell, but, corporate earnings, which really get underway this week, are expected to remain strong in the third quarter amid a still-healthy economic backdrop. Investors should resist the urge to time the market or abandon equities altogether. Instead, use this latest market retreat as a reminder to be vigilant about portfolio discipline and rebalancing. Towards the end of a bull market, investors tend to be overweight assets that are increasingly overpriced if they have not been systematically rebalancing. This pullback is a reminder to assess allocations and rebalance accordingly.