Should You React To Stock Market Volatility

The best answer is "No", but that’s not always the easiest.

As you know the markets started 2018 with the wind in their sails, and we all watched as indexes continued their nearly straight-up trajectory from 2017.

Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February. On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant. The next day, all 3 indexes posted positive returns.

I understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. My goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life. 

Putting Performance Into Perspective

When markets post dramatic losses, many people wonder what causes the turbulence—and may assume negative financial data is to blame. However, that wasn’t the case with the recent selloff. 

No negative economic update or geopolitical drama emerged to spur the selloff. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline.

While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.

Volatility Facts

 

Average Intra-Year Declines: Since 1980, the S&P 500 has experienced an average correction each year of approximately 14%. But in 2017, the markets were unusually calm, fluctuating only 3%. Before this recent decline, the S&P had gone more than 400 days without losing over 5%—its longest span since the 1950s.

Takeaway: Markets fluctuate, and the recent lack of volatility is what’s truly unusual.

Percentages vs. Points: Many news articles mention that the Dow’s 1175-point drop on February 6 was its highest decline in history. While this statement may be true, it leaves out a key detail: The higher an index goes, the smaller a percentage of its total that each point represents. In other words, 1175 points doesn’t have the same impact at 25,000 that it does at 10,000.

Takeaway: Focus on percentages not points to gain a clearer view of market performance.

Recovery From Bad Days: The S&P 500 fell 4.1% on February 5, but within one day, the index regained 1.7%. This performance surpasses historical data. If you analyze the S&P 500’s 15 worst days—where the index lost an average of 8.16%—stocks were still in negative territory 1 day later. But, in 13 instances, stocks were back up within a year by about 21%; they were always in positive territory 5 years later.

Takeaway: Even when stocks lose more ground than they just did, they recover and positive performance returns.

 

Remembering The Last Market Correction

In August 2011, the S&P 500 lost 6.66% in one day. At that time, the European debt crisis was in full swing, the U.S. had lost its AAA credit rating, and the financial sector was reeling.

Facing that situation, impulses to leave the market and avoid further losses could have arisen. As is so often the case, however, staying invested paid off.

Only a year later, the S&P 500 had gained over 25%.

Knowing Where to Go From Here

Over short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long term, however, economic fundamentals drive the markets. The reality is that equities don’t move in a straight line. Even if volatility is here to stay, we know that price changes can provide new market opportunities.

I encourage you to focus on your long-term goals, rather than short-term fluctuations. Don’t allow emotions to derail your plans. You should feel comfortable in your financial journey. If you don’t have a financial plan in place – please feel free to contact me and I’d be happy to help you get started.