☕️ Last Week Was Brutal. It Was Also Perfectly Normal.
Nov 02, 2026Howdy! 👋
Last week's selling was brutal.
It was also a) not out of line and b) not unexpected – at least not if you've been reading along.
What happened is professional deleveraging, plain and simple.
Wall Street's merry marauders – yeah, those folks – borrowed a pile of money to crowd into the same handful of names, the Fed made the money they had borrowed more expensive, so they made the decision to bail. Then, the computers got in on the action and it was an e-ticket ride to the basement.
What's next?
Here's a little perspective.
I'm reaching out early today because I want you to have this ahead of the opening bell so that you can think clearly and, hopefully, avoid making very expensive mistakes.
1 – Friday stung. History barely blinks.
Friday was rough.
The S&P 500 fell 1.8% for its worst day since June and closed out a third straight losing week. The Nasdaq fell 2.9% and the Dow dropped 572 points.
Now for the part the headlines left out.
Friday doesn't come close to cracking the S&P 500's 20 worst days since 1923. Number 20 on that list is a 7.47% drop back in 1940. The top three are -20.47% (1987), -12.34% (1929) and -11.98% (2020).
Friday wasn't even the worst day of this year. That honor still belongs to June 5, when the S&P 500 fell 2.64%.
And here's the scoreboard from the top. The Nasdaq is down 7.8% from its October 6 record high. The S&P 500 is down roughly 3% from its peak.
Three measly percent.
Hmmm. 🤔
Why you should care. Viewed in context, a 1.8% down day is an ordinary Friday in a very long history of 'em. Context is what keeps a bad Friday from turning into a bad decision today.
What to do: Nothing dramatic. Ask yourself one question: has anything about the stocks you own changed since Thursday? If the answer is no, and for most of the best companies we talk about regularly, it is, then you already know what to do.
Keith's Investing Tip: The scariest number in any selloff is the one you look at without context. Do NOT let your emotions drive.
2 – Normal by any yardstick you care to use
Pullbacks are a feature of the stock market.
Many investors conveniently forget or simply don't want to remember.
Corrections, pullbacks, down days... they come standard, just like seatbelts.
Capital Group's latest data, covering 1952 through 2025, shows the S&P 500 has a 5% decline about twice a year and a 10% correction about once every 18 months.
J.P. Morgan puts the average intra-year drawdown since 1980 at 14.2%, and the S&P 500 still finished positive in 35 of those 46 years.
My own research agrees.
Point being... a 3% dip in the S&P 500 and a sub-10% pullback in the Nasdaq barely register. They're the market clearing its throat.
It feels terrible. I understand that. Nobody enjoys watching a few weeks of gains evaporate between breakfast and the closing bell.
I really want you to hear me, particularly if you're nervous.
Now is the time to do yourself a HUGE favor by recognizing one market truism above all others…
The markets are the only store on earth where customers fear a sale.
Think about it.
If your favorite steakhouse knocked 8% off the ribeye, you'd make a reservation. And if you don't like beef, then your favorite restaurant.
You get the idea here.
So why is it that when the best companies in the world go on sale, most folks run for the door?
Because they let their emotions drive – a cardinal no-no that has probably wrecked more retirements and investments than any other singular cause in history.
Why you should care. Every 5% dip and every 10% correction in history has felt like "the big one" while it was happening. Acting on it is where the damage gets done. So don't be foolish!
What to do: If you've got LowBall Orders working on the companies you want to own, this is exactly what they're built for. If you're putting money to work on a schedule, keep at it. Buying when it feels lousy is how you end up ahead when it feels great.
Keith's Investing Tip: Corrections like this one are the price of admission. Pay it willingly and you get to stay for the whole show.
3 – Hedge funds did the selling. Margin clerks did the deciding.
Goldman Sachs' prime brokerage desk gets a front-row seat to what hedge funds actually do with their money. Ahem, cough, cough.
Here's what the data shows.
Long-short funds net sold global AI stocks for five straight sessions from October 8 to 14. That wiped out every bit of their net AI buying since the beginning of 2025.
Nearly two years of accumulation, gone in a week with long selling running at roughly 3.5 times short selling.
Translation?
A huge bunch of highly-leveraged short-term thinking funds sold what they owned to raise cash and cut risk because they had a margin problem.
That's a positioning problem, plain and simple.
The businesses underneath those tickers are humming right along, and that's what you want to focus on.
I'll also point out the timing, because it matters.
The headlines pinned Friday on Alphabet's cash burn, Amazon's capital spending and Intel's ugly forecast. Not true; the hedge fund stampede started roughly three weeks before any of those companies reported.
It may not be over yet so you want to be ready... for the opportunity it presents.
Gross leverage on Goldman's prime book is still 310.3%, near five-year highs. Tech still makes up 23.5% of the book, in the 90th percentile of the past five years.
In plain English, there's still a lot of borrowed money sitting in the same crowded seats. If the pros need to cut more, they'll sell more of what they own, and that means more choppy sessions in the names everybody loves.
And in the same breath, gobs of opportunity for smart investors.
Why you should care: When the pros deleverage, they sell whatever they can sell fastest, and that's usually their biggest, most liquid winners. That means the best companies often get hit hardest in a forced sale precisely because they're the easiest to sell... and history suggests exactly what smart investors want to be buying.
What to do: Don't let somebody else's margin call make your decisions for you. If there's another leg down, treat it as a second chance to buy the companies you wish you'd bought the first time around. Stick to YOUR plan.
You do have one, right?
If not, I do and it's something I share with the One Bar Ahead® Family. You're welcome any time.
Keith's Investing Tip: Keep your emotions out of the equation and your odds of doing something that you'll regret for years decrease dramatically.
4 – Follow the money… and the price of money
Which brings me to the real culprit: the Fed.
On September 16, the Fed raised rates by a quarter point to a target range of 3.75% to 4.00%. Last Wednesday, October 28, it held there in a 10–2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack both dissenting in favor of another hike. Chair Warsh didn't push back on December either, so the futures market now expects one more increase before year-end.
Meanwhile, the 10-year Treasury yield topped 5.30% in October.
You know where I stand on this.
I've said for a long time that the bond market would eventually discipline the Fed, and that investors would start caring more about the return of their money than the return on it.
Now connect the dots.
A hedge fund running 310% gross leverage carries about $3.10 of positions for every $1 of its own capital. When the cost of carrying those positions goes up, and the market starts pricing in even more expensive money ahead, the math gets ugly fast. Risk managers order cuts. Funds sell what they've got the most of.
Right now, that's AI.
Even the AI jitters ultimately trace back to rates. Higher borrowing costs make every data center more expensive to build and finance, which is exactly the worry that's been dogging chip stocks.
And here's the kicker. On Friday, the 10-year yield actually fell to 4.93% as money ran for safety. If that holds, it takes some of the heat off the very leverage that forced the selling in the first place.
It's worth noting that nearly as many S&P 500 stocks rose on Friday as fell, with names like ExxonMobil, Chevron, Mondelez and Colgate-Palmolive climbing after strong earnings. Many names we talk about in One Bar Ahead® ended higher.
Keep it stupid simple.
Money changed seats inside the market and stayed in the building.
Why you should care: Last week looked like a crowd shuffling from one side of the room to the other because the rent on their seats went up.
What to do: Keep an eye on earnings because that's what people who are tasked with turning a buck do with real money. The Fed is no longer the smartest money in the room. In fact, I submit it's probably the dumbest but that's just me. Make sure you own great companies because that's where the money is headed in the meantime.
Keith's Investing Tip: Short-term traders react to the cost of money – the "vig" – but smart term investors look at what the headlines haven't figured out yet... long term profit potential.
Which brings me to...
5 – Meanwhile, earnings are terrific
According to FactSet, 60% of S&P 500 companies have reported Q3 results so far and 82% have beaten estimates. Blended Q3 earnings growth is running at 30.2%. If that holds, it'll mark the third consecutive quarter above 25%.
Think about that for a moment.
Thirty percent earnings growth, three quarters running, and the Nasdaq is off less than 8% from its record high while the S&P 500 is off by a mere ~3%.
Even more interesting… the Magnificent 7's blended earnings growth (22.6%) is now lower than the other 493 S&P 500 companies (32.6%). So are many tech-related PE ratios.
FactSet had been projecting that crossover for Q4; I said it'd be a quarter early and that's where we are today.
Valuations are hardly stretched despite what the spreadsheet gang would have you believe. FactSet pegged the S&P 500's forward 12-month PE at 18.7 as of October 23, below both its 5-year average (19.8) and its 10-year average (19.1).
Why you should care: Record-setting growth at the same moment hedge funds are dumping shares tells you the selling started on the financing desk not because there was a business problem with the case for ownership or investing. Earnings are broadening out well beyond the handful of names everybody crowded into, and that's about as healthy a backdrop as you can ask for as an investor
What to do: Some of the fastest growth in the market right now is coming from companies most folks haven't bothered to look at in years... like, oh, I dunno, Chevron and key medical companies I have repeatedly encouraged the One Bar Ahead® Family to think about owning. That's where your shopping list should be getting longer, stronger and more effective.
Keith's Investing Tip: Earnings are the gravity of the stock market. Prices can float away from them for a while, but they always come back down to earth.
Bottom Line
Again, if you're tempted to flip out or already crawling around on the ceiling, I get it.
History says this is normal.
The investors who come out ahead from here will be the ones who keep their emotions out of the cockpit, stuck to the plan and used the sale to pick up the best companies at better prices.
Be that investor.
Buy the best, ignore the rest!®
Oh, and if you're up for it, please join me on Varney & Co at 0920 EST later this morning ahead of today's opening bell. 📺
You got this – I promise!
Now and as always, let's MAKE it a great day.
Keith 😀
