The Return of Market Volatility
Updated: Jan 17, 2020
Stock market volatility is back
Stock market volatility is back, and it's hard to keep the last few day's market declines in perspective when we have not experienced any volatility in recent years. We are just not used to it. The 1,175 point decline in the Dow yesterday was the biggest single day point decline, but not in terms of percentages (4.6%). One thing we should all remember is that given how high the stock market has climbed, even large point declines don't translate to large percentages as they did years ago. In fact, the drop in the Dow this week has only taken the market back to the record-level highs that were reached at the beginning of December, just two short months ago.
Stock market corrections happen
There's no guarantee that the stock market won't continue to decline, but stocks haven't suffered a 5% drop since Brexit (remember that?), and the last 10% drop hasn't happened since early 2016. Since last Friday, we are approaching the 10% correction mark. Stock market corrections happen, and over history, they usually happen at least once per year on average. The U.S. economy naturally goes up and down over the business cycle, with the stock market doing the same. Corrections are a normal, healthy part of the business cycle and to be expected. What was more unusual was the constant rise of the equity markets without interruption.
Volatility was long overdue
Low interest rates, monetary stimulus, and economic growth have contributed to the continued rise of the market; we knew volatility was long overdue. For the first time in many years, we are seeing wage growth and the threat of rising inflation. The fear of an overheating global economy could result in central banks raising interest rates, which often is a precursor to a recession and a bear market. But I don’t think we’re there yet, and nobody has that crystal ball. This drop may be a normal correction, or it could be the end of the bull market, it’s just too early to tell. The majority of market corrections do not turn into recessions, so let’s try and keep it all in perspective. While we never know the length or amount of a market correction, we do understand that markets correct periodically.
Stay focused on goals
There’s no need to panic, and we are urging our clients to remain patient with their long-term investment plans based on their goals and time horizons.