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Volatility Is Back—with a Vengeance

Volatility Is Back—with a Vengeance

OK—now it’s obvious that we’ve been spoiled. For most of the last year and a half, it seemed like the markets only went up. Deep down, we all knew that’s not how it works. Markets go up, and markets go down. They always have, and they always will. Over the long term, the trend has always been for markets to move higher. But in the short term, there’s no telling what’s going to happen. Last year seemed to lull us into a false sense of security.

This is a top-of-mind subject for a lot of folks right now because of the recent activity in the market. As I write this, we are coming off the worst week in the markets since January 2016. We saw a 700-plus point drop in the Dow on Thursday, and a 400-plus point drop on Friday. By the time you read this, we could be well on the road to recovering that lost ground. Or we could be lower.

Markets are historically a lot more volatile than we’ve seen recently. A good measure of volatility is a daily move of more than 1% in the S&P 500. Looking at market data all the way back to 1901, we see that the markets have averaged about 53 days per year with moves of more than 1%. That’s the average. In 2008, during the financial crisis, we had 134 days, and in 2009, there were 118 days.

In 2017, we had 10 days of 1% moves. Ten. There’s only one other time in history that comes close to the calm we enjoyed last year. During the years 1963 through 1965, markets experienced similar stability.

So far this year, we’ve already had 23 days of moves more than 1%. It’s not even the end of March, and we almost have twice as many as last year. Recency bias makes the moves of the past week seem even more dramatic. It’s like we’ve been sitting in a nice, lukewarm bath when someone suddenly douses us with ice water.

We shouldn’t be surprised by the market moves, but we are. We’ve had the perfect storm of events to get us here. We’re nine years into the longest bull market ever, and even a strong bull gets tired. We’re finally seeing an uptick in inflation, which has led to an increase in interest rates. That’s usually bad news for stocks. Saying that we are in a volatile political environment would be an understatement, and the unpredictability of the current administration just provides more fuel for the fire. All that, and now the potential danger of a trade war, has put investors on edge.

It’s not all bad news, though. The recent tax cuts have put more dollars in most paychecks, and corporate earnings are still pretty good. And while inflation is back, it doesn’t appear to be problematic yet.

So, what’s an investor to do? My advice is always the same. First, make sure that you have adequate cash reserves so that you can stay invested during tumultuous times. Don’t let moves in the market, no matter how big, lead to reactionary moves with your portfolio. Make sure that you are properly diversified across the major asset classes and that you have an appropriate mix for your personal situation. Finally, rebalance your portfolio when it’s necessary to maintain your mix.

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