Is Market Volatility Normal?

If you have listened to the news or looked at your portfolio lately, you’re aware that the markets have been volatile.  While most clients don’t mind volatility on the way up, volatility is less palatable on the way down.  Recently we have seen some very dramatic drops where the Dow has lost over 1,000 points (over 4%) in a single day.  Is this market behavior normal?  Should you be concerned?  It’s likely that some of these questions have entered your mind.  The intent of this article to share some perspective and market history to answer a few of these nagging questions. 

Let’s begin with volatility.  The markets have been more volatile than we’ve experience in the recent past.  This is exaggerated by the lack of volatility that preceded the recent decline. In fact, 2017 ended with some of the lowest volatility readings in history!   

Data Source: Morningstar

Low volatility periods often cause investors to forget that markets and prices can change rapidly.  While investors enjoy these periods of tranquility, there are many professionals who believe that bouts of volatility are healthy for the markets because they keep valuations and speculators in check.  Furthermore, volatility reminds investors that stocks may not be an appropriate investment for everyone.

At one point in February we witnessed an 11% decline in the S&P 500 from its peak.  Declines more than 10% are considered corrections.  Is a correction normal or should we fear the worst, a sustained bear market? 

To investors uneasiness, it is common to experience a correction during a year.  As presented in our last newsletter, an intra-year correction occurred in nearly two-thirds of the years since 1980.  That same study revealed that the market generated a positive full year return 76% of the time.  If we were to isolate the 25 years in which the intra-year low dropped 10% or more, the market still generated a positive full year 62.5% of time.  The take away is that markets are historically more volatile than of late and market pull backs are not always a bad omen for future declines.

Another interesting fact is the duration of the current monthly winning streak this market has achieved.  According to FactSet Data, December marked the 14^th consecutive month of S&P 500 gains.  This accomplishment has only been eclipsed one time in US history.  Back in May of 1959, nearly 60 years ago, when the S&P ended a 15 month stretch of consecutive monthly gains.  Remarkably, 2017 will go down as the only calendar year on record without a single down month.

We believe the year ahead will continue to see increased volatility over last year and the economy will remain strong.  We are seeing signs of rising inflation and the bond market is factoring in expectations around how the Fed will attempt to keep inflation in check.  We have not seen signs that the larger secular bull market is nearing its inevitable end.

At Kaizen we keep our clients’ investments allocated at the appropriate risk levels for their specific situation.  If you are an individual not currently working with Kaizen and feel that your financial plan and investments would benefit from our professionals, please reach out to us.  We are here to make sure our clients are on the right track to reach their financial goals.