Why October’s stock market crash might be good news for investors

The stock market marked yet another Black Wednesday this October as three of the major indices — S&P 500, Dow Jones and Nasdaq — recorded staggering losses that are being compared to other catastrophic crashes in financial history.

On October 10th, every single stock was down in the Dow, which also dropped about 3.2% in a panic reminiscent of the October crashes of 2008 and 1987. The S&P 500 registered its worst month since September 2011 with a loss of $1.9 trillion. NASDAQ plunged more than 4% for its worst day in seven years. 

The losses were spread widely across industry sectors, but led by the typically top-performing technology stocks. Amazon ended the month down 20.2%, and Netflix ended down 19.3%. Facebook and Google’s parent company, Alphabet, finished October down 7.7% and 9.7%, respectively.

The overseas markets also felt the effects of the decline, especially since they were already slumping due to weaker economic growth and concerns about trade and politics.

So, what caused the stock market to decline?

Analysts have cited a number of factors, most prominently the recent spike in the yield on the US government’s 10-year Treasury Note. The Treasury Note is a loan made to the US government by investors and is popular for its low risk. Its yield refers to the rate of return on the investment. In the US’s current bullish market where investors have ample opportunities to earn high dividends, there is a decreased demand for the Treasury Note, which has resulted in discounted sales and attempts to increase yields or returns on investment for investors. In return, interest rates on mortgages and other loans are increased to compensate other investors for their higher-risk ventures. When borrowing costs on assets like houses and cars increase, investors are more likely to be skittish in the markets. 

Other factors, such as the ongoing trade war between US and China, have made investors further unsure of future corporate earnings. With both countries imposing tariff after tariff on imported goods, US companies’ profits could suffer because of rising manufacturing costs and declining sales in the Chinese market. This awareness has contributed to investor anxiety, which is worsened by the possibility of President Donald Trump’s tax cuts coming to an end.

The US economy has shown record growth in the second quarter of this year due to Trump’s tax cuts and his relaxation on business regulations. Plus, the job market has shown marked improvement, with September’s unemployment rate at 3.7%, the lowest in nearly 50 years. Therefore, there's no longer a need for interest rates to stay low and the Federal Reserve is raising them.

Trump’s criticism of the increase in interest rates adds another complication. When he attributed the October 10th stock market decline to the Federal Reserve’s policy decisions, describing the increase in interest rates as ‘going loco’, many analysts saw this as an attempt to undermine the bank’s independence from political interference. This approach could cause investors to lose confidence in US economic policy.

But why are tech stocks, in particular, dropping?

The answer is because they usually perform so well.

When a stock market decline begins, investors tend to first sell the stocks with the biggest gains to secure those profits. However, the tech market is also affected by external factors, such as increased regulatory scrutiny from the US government and manufacturing issues caused by interrupted supply chains due to the trade fight with China.

So, what should you do with your investments?

The stock market’s decline doesn’t mean you should put your investment plans on the backburner. In fact, you should do the opposite, according to Manoj Krishnan, CFA, Head of Private Wealth Group at Continental Financial Services.

While admitting that, “there are lots of uncertainties in terms of how trade will be affected, the impact on inflation, the impact on high interest rates,” Manoj argues that the market still offers good opportunities for investment to both first-timer and regular investors. 

“It would make sense to make more staggered investments,” he said, adding that, “There might be certain pockets like technology where certain good deep value investing options are available.” Deep value investing refers to investing in companies so deeply undervalued at present that your risk of losing money is lower and your odds of getting a sizable return are higher.

He also recommends that investors monitor the effects of the trade wars on the stocks. While estimating that the “actual impact of trade wars will start trickling in the next few quarters,” Manoj recommends investing in US companies who produce locally manufactured goods as they are likely to be safe from the effects of the trade wars. 

For regular investors, he advises them to “hold on to their stocks and keep adding as market indices are coming down. Keep investing on a regular basis.”

However, in general, Manoj estimates that stock prices have “come down to a reasonable level, not cheap. Markets are not on discount. If you keep investing now, you can expect moderate growth in terms of your investment.”