Stock markets declined in September, with the S&P 500 index down more than 5% from its all-time highs. Yet, it posted a positive quarter and historical data points to further upside.
Investors’ behaviour changes very fast. All it takes is the volatility to rise a bit, and investors throw away their original plan. They all want to “buy the dip”, but investors are usually gripped by fear when the dip presents itself.
The S&P 500 index is well off its all-time highs – down over 5% from record levels. On its way lower, the stock market triggered strong demand for safe-haven currencies, such as the Japanese yen and the Swiss franc. The Japanese yen, in particular, was bought aggressively in September, as seen in the USD/JPY pair dropping from 112 to 111, or the EUR/JPY pair falling from 130 to well below 129.
Time to Panic or Time to Buy the Dip?
The stock market also has a strong influence on other markets. Therefore, a stock market decline impacts the currency market, just as it impacts it on its way up.
Now that stocks are down, what should investors expect for the next quarters? If history is of any guidance, investors should expect higher stock market prices in the period ahead.
Whenever the S&P 500 was up six quarters in a row, as is the case now, stocks have never been lower two quarters later. How about four quarters later (i.e., one full year)? Well, stocks were up by 15.5% on average.
Time to buy the dip?