Broker Check

The Return of Volatility in 2018

| March 07, 2018
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 We’ve had some big swings in the market over the last few weeks.  Because of this, many of our clients are asking for a sanity check.  “Why is the Dow moving so violently in the matter of hours?” “I don’t remember it ever moving this much!”  Let’s take a moment to reflect on what happened, why it happened, and how we can prepare for the future.


It’s a Great Time to Be An Investor! (?)

From November 11th, 2016 to January 26th,2018, the S&P 500 (S&P) and the Dow Jones Industrial Average (Dow) have seen steady growth with very few down days (See chart below). The returns over this period have been great as well!  For over a year it felt like anything you invested in wasn’t a question of “if” it would increase in value, but instead “how much” would it increase in value. During times like these (fun times to be an investor), some people tend to forget that the market moves two directions: up and down.

 Long-term investing is about determining your acceptable level of risk and managing your portfolio to that level using your asset allocation model.  When we have great market runs, some investors may turn into speculators. They start “chasing” top performers and ignoring their risk allocations. While this can sometimes allow you to achieve higher short-term gains, it may not pay off in long-term results. Other more “cautious” investors who had their money “sitting on the sidelines” waiting for a sign to invest might be convinced to move from cash to equity.  


S&P 500 - November 11, 2016 - January 26, 2018


Dow Jones Industrial Average - November 11, 2016 - January 26, 2018



The Return of Volatility

The last 3 weeks of this period in time (or the first 3 weeks of 2018) were looking great!  It looked like the nice run would continue into 2018. THEN, on January 29th, we started seeing some market drops that sent the media into full speculation mode.  

 “Is this a normal market correction or is this something sinister?”  “Why are the market indices going down?” “Is there a problem?” “Should we move all our money out of the market?”

 S&P 500 - January 29, 2018 - March 2, 2018


Dow Jones Industrial Average - January 29, 2018 - March 2, 2018



Market Corrections

First of all, what is a market correction?

A market correction is when a market index drops below its highest price by at least 10%.  While this may seem like an ominously bad thing, it’s actually a good sign for a healthy market and happens quite often.  Historically, market corrections happen around once a year.  The reason the latest correction in February felt like such a huge deal is because we had gone so long without one.

 But what does this all mean?“Is this the beginning of a bear market downturn?”  “Is it just a blip on the ever marching market?”

 We’ll have to wait and see.  It doesn’t matter to long-term investors who are taking the appropriate amount of risk.  A disciplined investor will stick to their original plan and use this opportunity to *rebalance their portfolio.

*Remember that to rebalance, you buy and sell your positions back to your original plan’s allocation.


Rising Interest Rates

Ok, so we had a market correction, but what else was going on?

 For the first time in over a decade, the Federal Reserve (the Fed) is increasing the Federal Funds rate.  On the surface level, this is great news!  The Fed is raising the rates because the economy is doing well and hitting their targets of low unemployment rates, stable growth of GDP, and inflation at 2%.  Now that the Fed has started slowly raising rates, the long-term interest rates have started to increase.

 That all sounds good, right?  However, some investors are worried that the long-term rates are moving up too quickly which is a sign of higher inflation.  If inflation is too high, then we might go into a recession leading the markets well below the correction that we’ve had. Because of this fear, many investors got out of the market when they heard of the long-term rate increase.  When many investors get out of the market (sell), the market goes down. Again, long-term investors will not try to time the market, but will instead use this opportunity to rebalance.


US Tariffs

Still with me? Market corrections, rising interest rates, and…tariffs.

 Lately, it seems every conference and tweet of President Trump causes some sort of major reaction. Recently, Trump said he wanted to renegotiate several trade deals and even place a tariff on incoming steel and aluminum.  As expected, there was a “great disturbance in the force” (a.k.a. the markets dropped dramatically while the media worked into a frenzy).  

 A few projections have already been released as to what this policy will mean.  Some say US manufacturers will use more US created steel and aluminum.  Some say this will encourage US manufacturers to move their sites outside of the US to avoid the tariffs.  To see the full results of this type of policy, we’ll have to wait and see.


So What Now?

What’s happened is done, so what can we do now?  What happens next? Will the market stay volatile?  While no one knows for sure, I would argue there are several positive things to consider.

It’s a Good Time to Rebalance  

This could be a great opportunity to rebalance your portfolio or talk to your advisor about your long-term goals.  Rebalancing is more efficient during increased volatility, as the volatility creates more opportunities for rebalancing. If you move more investments to equity, you may be taking advantage of Investments 101: Buy Low, Sell High.

High Consumer Sentiment

Periodically, researchers set out to get a reading on consumer sentiment, which is how consumers like you and I feel about our money and our financial outlook.  The University of Michigan’s consumer sentiment index for February was the highest it has been in 14 years.  The unemployment rate is near record lows.  People are finally feeling better about their wages.  And that’s a good thing.

 In the end, the market will continue to shock us with its overreactions, temper-tantrums, and randomness.  The best thing we can do is have a plan, invest for the long-term, and keep a leash on how much risk we are taking.  Our clients benefit from not worrying about the short-term fluctuations of the market and can focus on their long-term goals.

Ready to invest for the long-term? As MSMF, we work with you to establish your ideal long-term outcomes and then create a plan to help you reach them. Call us at (314) 677-2550 for a free no strings attached consultation.

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