Woah, what was that?
After months of relative calm, Wall Street has been jolted by a sudden run of turbulent trading.
The swoon wiped more than 1,300 points from the Dow Jones Industrial Average over two days and dragged the benchmark S&P 500 index down more than 5 per cent. The VIX index, which measures how worried traders are about a decline in stocks, climbed Thursday to its highest level since February, when the S&P last had a correction, or a 10 per cent drop.
What now?
Experts say this new eruption of market volatility should not be surprising, especially after the long stretch of relative calm investors have enjoyed.
Over the summer, traders set aside worries about the escalating U.S.-China trade dispute and instead focused on more encouraging developments: solid economic growth and record corporate earnings. It helped that stocks were on the rise — the S&P 500 hit an all-time high just four weeks ago.
So after several months of gains, a pullback would be expected, said John Lynch, chief investment strategist at LPL Research.
“Volatility is back and it may require more active strategies on the part of investors to pursue their long-term goals,” Lynch said. “Volatility is also not to be feared, but embraced, as varying data points will cause bouts of market anxiety. But remember that fundamentals are still strong.”
The economy is indeed quite strong by many measures — consumer spending is growing, unemployment is low and manufacturing surveys are near record levels. And many experts say that is more important than the market’s daily ups and downs.
So what’s behind this week’s upset?
Investors have grown concerned about a recent, steep drop in U.S. government bond prices and an ensuing upward move in bond yields, which makes bonds more attractive relative to stocks. The market is also worried about rising interest rates, which tend to climb on expectations of future economic growth and inflation and can increase costs for business — slowing growth and dampening corporate profits.
“There’s some concern that third-quarter earnings could be maybe a little bit less robust than they were in the second quarter and there could be more pressure on profit margins,” said Willie Delwiche, investment strategist at Baird.
Worries about a slowdown in the global economy and the escalating U.S.-China trade dispute also have contributed to investors’ unease. And markets typically see increased volatility in months preceding midterm elections.
“We are not surprised by the uptick in volatility toward more normal levels,” market strategists at Wells Fargo Investment Institute wrote in a report Thursday, adding that “it’s too soon to say that the pullback is over.”
Having bonds and equities selling off may feel like the worst of both worlds for investment portfolios, but the market’s shift isn’t as bad as it might seem, said Michael Crook, head of institutional strategy at UBS Global Wealth Management.
He notes that the S&P 500 is basically back to where it was during the summer, and only down slightly from its all-time high. In addition, the negative return in bonds barely registers when one considers how bonds have performed this year.
“That’s very normal volatility, and while it has been acute — like all market drops — it only erases a few weeks of gains,” Crook said.
The market’s stability in 2017 may have given investors a false sense of security too, said Nationwide Chief of Investment Research Mark Hackett. The fundamental strength of that year resulted in historically low volatility and market pullbacks.
One natural reaction to increased volatility is the inclination to get off the wild ride and sell. If you have a lengthy time horizon for the investment, say a decade, the general recommendation is to resist that temptation. Stocks have historically offered some of the biggest returns over the long term for investors.
For investors who want less volatility, bonds, savings accounts or other investments offer less risk. The trade-off is that returns over the coming decade will likely be lower.
Remember that what is happening in the headlines is not necessarily what is happening in your portfolio, said Judith Ward, a senior financial planner at T. Rowe Price.
Still feeling jumpy? Review your portfolio and make sure your holdings are where you want them to be and that they’re on course to meet your goals. Rebalance the portfolio, if needed, but resist the urge to flee.
Any financial adviser will remind you that those who sold in the depths of the global financial meltdown missed out on big gains in years that followed.
