How Should You Respond To Volatility?
How should you respond to volatility? When considering this question, you may want to think about the bigger picture before making any decisions.
In 2017, Wall Street saw very little pronounced volatility. The absolute daily percentage change for the S&P 500 in 2017 was approximately 3%, the smallest seen since 1964. The market climate is rarely so favorable.1
In 2018, the story is different. In the first quarter alone, the S&P saw nearly two dozen trading days with a 1% swing; there were eight such trading sessions in all of 2017. We have had a correction, and plunges of several hundred points in the Dow (which no doubt brought back memories of 2008 for some investors).2
So why should you stay in equities when the market rollercoasters like this? Well, you can point to two good reasons.
One, the economy is in excellent shape. The jobless rate is 4.1%. The economy’s yearly growth rate is now at an encouraging 2.6%. Inflation is at 2.2%.3,4
Two, the first-quarter earnings season is just ahead, and it could be great. FactSet, the respected investment analytics company, thinks S&P 500 firms may report their best annual growth since 2010 (to be specific, they forecast an 18% increase in earnings for fiscal 2018.)5
The events of this year remind us that the market faces constant challenges. Some come from left field and some gradually emerge. These setbacks take time to overcome, but they are often overcome in the near-term. Since World War II, even the average bear market has lasted just 22 months.6
Even with all this turbulence, the market is still 20% higher today than it was a year-and-a-half ago. Take this volatility for what it is – pronounced, but also representative of the way the stock market normally works. You could say that the “old normal” has come back after a comparatively placid 2017. Accept it as part of the course of investing. Stay invested, ride it out, and stay in the market for the long run.7
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JST Investment Consulting does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable. The information in these materials may change at any time and without notice.
Citations.
1 - marketwatch.com/story/the-last-time-stocks-were-this-quiet-was-the-year-the-beatles-went-on-ed-sullivan-2017-12-14 [12/14/17] 2 - marketwatch.com/story/the-dow-and-sp-500-have-already-doubled-the-number-of-1-moves-seen-in-all-of-2017-2018-03-26/ [3/26/18] 3 - tradingeconomics.com/united-states/indicators [4/3/18] 4 - money.cnn.com/interactive/pf/taxes/tax-cuts-by-state/index.html [4/2/18] 5 - cnbc.com/2018/03/30/stocks-should-see-a-spring-boost-in-april-says-lpls-ryan-detrick.html [3/30/18] 6 - cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction--heres-what-usually-happens-next.html [2/8/18] 7 - nytimes.com/2018/04/03/business/stock-markets.html [4/3/18]
