Market Overview

An Ugly October Punishes A Slew Of Sector ETFs

An Ugly October Punishes A Slew Of Sector ETFs

For some market participants the real treat on Oct. 31 won't be Halloween candy, but rather the end of the month.

Over the history of U.S. equity markets, October has been a challenging month for stocks and October 2018 lived up to that reputation. As of Oct. 29, the S&P 500 sported a month-to-date decline of 9.4 percent, putting the benchmark U.S. equity index on pace for its sixth-worst October performance in history.

What Happened

Not only has this year brought another October challenge for domestic stocks, October 2018 is poised to be one of the worst months for stocks in 45 years.

“Also, month-to-date, the S&P 500 is having its 34th worst month on record and its worst month since Feb. 2009, when it lost 11.0%,” said S&P Dow Jones Indices. “The top ten worst months in S&P 500 history in chronological order date back to Nov. 1973, nearly 45 years ago, when the S&P 500 lost 11.4%, the most in 26 years, since Nov. 1948, when it lost 10.8%.”

Underscoring the weakness in U.S. stocks this month are significant declines across size segments, indicating mid- and small-cap names have not been immune to the selloff.

Why It's Important

Sector-level weakness was particularly acute this month with some sectors, including consumer discretionary and energy, notching some of their worst monthly performances on record. The Energy Select Sector SPDR (NYSE: XLE), the largest equity-based energy exchange traded fund, is lower by 13 percent this month.

Energy was the worst performing sector across the sizes, losing 13.8%, 19.1% and 21.7% in large-, mid-, and small-caps, respectively, as the S&P GSCI (WTI) Crude Oil lost 8.5% month-to-date (through Oct. 29, 2018),” according to S&P Dow Jones.

Weakness in Inc. (NASDAQ: AMZN) is highlighting concentration risks in cap-weighted consumer discretionary ETFs like the Consumer Discretionary Select Sector SPDR (NYSE: XLY). Amazon, by far the largest holding in a slew of large-cap, cap-weighted consumer cyclical ETFs, is down 23.65 percent this month. As a result, XLY is lower by 11 percent.

Like the S&P 500 Energy Index, the S&P 500 Consumer Discretionary Index is on pace for its third-worst month on record.

What's Next

Past performance is never a guarantee of future returns, but historical data confirm that when stocks experience significant October losses, November can be rough as well.

“In the past, the S&P 500 lost in all the Nov. months following the most losing Oct.’s. The Nov. returns of the S&P 500 in 1987, 1929, 2008, 1932, 1937 were -8.5%, -13.4%, -7.5%, -5.9% and -10.1%, respectively,” said S&P Dow Jones.

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