Volatility Strikes Again
Yesterday marked the second straight day of a Dow drop of more than 500 points. And while we have been talking about the return of volatility for quite some time, it still hurts when it actually shows up.
So here we are with the S&P 500 having fallen over 7% in the last week. That’s not a staggering number in and of itself, but it came quickly. Looking at the decline, there are several things we know right now, and some we don’t. Here is what we know:
- Cheaper than before – The market is now 7% cheaper to buy than it was a week ago. If it was a good idea as a long-term investment a week ago, it is definitely a good long-term investment when it’s just that much cheaper now.
- A strong economy – The economy is still doing well. We have unemployment rates that are the lowest in 50 years, inflation that is still moderate, and an economy that is actually picking up steam in its 10th year of expansion. Those can all be positive signs of underlying health.
- Corporations continue to hit record earnings levels – Corporate earnings for S&P 500 companies have increased a whopping 27% in the last year. This is projected to continue to grow, albeit not at a pace nearly that high, but strong nonetheless.
- Bonds matter – On Wednesday, the Dow lost 842 points while the bond index (Barclays US Aggregate Index) basically stood still. The Dow then lost another 545 points Thursday while the bond market index moved up 0.3%. Sure, bonds have been under scrutiny by some for their performance in 2018, but they are again proving their valuable role in a portfolio.
- Diversification helps – Another area drawing some negative attention this year were international markets (as measured by the MSCI EAFE Index) which have trailed the U.S. These markets haven’t been immune to the drop in the U.S. markets, but they are down a percent less than here which does nothing but help. We know international investments provide diversification to a portfolio and from a valuation perspective, they are currently trading 23% cheaper on a price-to-earnings basis relative to the U.S. market.
- Return without risk is impossible – While in the short-term, like in 2017, stocks seemingly provided all gain and no pain, we know over time the only way you can get return in a portfolio is with risk. After all, if there was no risk, there would be no risk premium available in the market for those willing to take risk on. And if there was no risk premium, all investors would receive the risk-free rate, which is Treasury Bills. Over the long-term, T-bills can trail inflation, meaning you lose real money over time. That’s unacceptable, and a reason we all need to take on some appropriate element of risk.
Now for what we don’t know. We don’t know whether this latest bout with volatility is a hint of more to come or a flashback to several of the other dips we have seen in the market the past couple of years. Here’s some recent history:
What’s more, if you held the S&P 500 index over the whole period depicted above through 10/11/2018, you would have seen a total return of 41.3%. That’s a huge return that takes putting up with uncertain downturns. This recent decline absolutely could be the start of something more. However, anyone that claims to know this with certainty is certainly guessing. History (recent and old) shows guessing is never a healthy way to handle your investments.
We understand if recent volatility is causing some stress for you. We are always here to help. Please do not hesitate to reach out to your team with any thoughts, concerns, or questions you might have.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The Dow Jones Industrial Average (Dow) is a price-weighted average of 30 actively traded blue-chip U.S. stocks. The MSCI® EAFE (Europe, Australia, Far East) Net Index is the pre-eminent benchmark in the US to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America measured in U.S. dollars. The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
