Recently, the stock markets have seen an uptick in volatility. Lately, increased unpredictability (large daily swings, late day sell-offs and the occasional large, intraday increase due to “bottom feeding”) has been more of the norm, creating anxiety for some, but opportunity for others –depending on how it’s viewed. To keep this in perspective, I want to provide some data for you to consider. The market is still up more than 30% since the end of 2016. In the last eight months, the market has ended higher each month than the end of the month before, and has ended up higher in 11 of the last 18 months. Some opine that one of the reasons for the recent drop was that the market was overvalued, overheated, and quite simply needed a breather. These 10% corrections are normal and healthy for market valuations to reset, but because they haven’t occurred much recently, it’s more difficult for us to process.
Basically, there were four other reasons for the recent increase in volatility. The first is that the Federal Reserve (Fed) raised interest rates. In a healthy economy, the Fed does not want runaway inflation, so they begin to raise rates in an attempt to slow growth. If the market perceives this rate rise to be too much too soon, this action could have negative impact. History indicates that we can have a rising stock market alongside rising interest rates. The second reason for increased volatility is continuing talks with China over tariffs and trade concerns. There is some recent indication that these talks have been positive, which is providing some market relief. The third reason is owed to computer-based trading programs. In large part, the buying and selling of stock is accomplished by computer-based algorithms that do not involve a human. These programs do not account for the fundamentals of a company’s balance sheet, debt restructuring, earnings per share, potential for growth, etc. They are programed to buy or sell in large blocks which can sometimes have a significant effect on market moves. Often, these moves occur late in the day after 1400, which is why last month, we saw great fluctuations during the last couple hours of trading. The fourth reason was the uncertainty of the midterm elections. Congressional swings can affect the market, at least over the short term.
Worth noting and remembering is a quote by Warren Buffet: “Be fearful when others are greedy and be greedy when others are fearful.” Recently, I read the following eye-opener in an article in The Motley Fool: “If you bought an S&P index fund in 1998 and held it until the end of 2007, you achieved a 301% total return. However, if you missed the best five days during that entire period, your total return would drop to 66%. If you missed the 20 best days during that entire 20-year period, your total return would be just 26%.”1 This sums up why those who have a desire to go to cash or treasuries during periods of volatility should not. You simply can’t time the market so you never know how day-to-day results will affect your overall return.
It has been proved over and over that it is most important to develop a long-term plan and stick with it. Equities still remain the play for long term investing and provide the best opportunity to outpace inflation and provide for the potential of adequate capital appreciation. It’s that rollercoaster ride that isn’t easy to stomach.