Through the end of February, the stock market (as measured by the S&P 500 Index) is up 11.50% year to date. This is not surprising considering the overdone melt down the market endured in the fourth quarter of 2018. Quite a reversal in a short period of time that has left the pundits wondering aloud what is going on? What happened to our cute little stock market that did nothing but methodically rise?
What happened is volatility returned to the stock market. And the dreaded “V” word does wonders to the direction of the stock market. Volatility can heighten due to a number of factors including (but not limited to): the Fed raising interest rates, economic contractions, lowered business forecasts, and global political discourse. All of these examples cause uncertainty for investors and believe it or not, many investors get spooked out (and back into) the stock market based on the short-term unknown impact(s) of these factors.
As investors (I use that term loosely for these folks) trade more, the volatility of the stock market increases. The chart to the right highlights the 1%+ daily moves of the S&P 500 Index by year for the past 15 years. Last year, we saw 120 days versus less than 10 for 2017. And the 2018 total was the most since 2009… our last recession.
The purpose of this writing is not to prognosticate that the next recession is near (it may or may not be), but to state that volatility is back, and this is normal! Have you ever wondered why over the long-term, stocks achieve far greater returns than bonds? It’s because you get rewarded a premium for riding out the volatility of the stock market. Unfortunately, there are many individuals who fancy themselves investors, but do not stay invested when uncertainty appears.
The damage these investors do to their own portfolio is shocking. The latest Dalbar study, which examines the average investor’s behavior on an annual basis and compares it to the general stock market, was just released and it clearly reflects that individuals and volatility do not mix! In 2018, the S&P 500 index sustained a 4.38% dip, while the average investor’s portfolio gave back nearly double that, 9.42%. We read this study on an annual basis and it is crystal clear that the return of volatility in 2018 is the main culprit for the drastic underperformance.
As we trudge through the rest of 2019, let’s remember that volatility is back, but don’t let it freak you out. It belongs in a normal stock market and over time is a key factor in investor returns… not to mention price declines (the cause of volatility) give us opportunities to make even better long-term investments. Let’s embrace the volatility, hang tight and ultimately achieve the returns we deserve versus the average investor return.