Our Thoughts Regarding the Recent Dose of Market Volatility
In case you were not aware, global equity markets experienced a massive dose of volatility over the past two trading days. From recent highs last week, the S&P 500 is down around 8%. Although this is not large from an historical perspective, it has garnered attention given the recent rapid pace of selling. The losses over the past 2 days has been ~6%.
For those looking for a reason for this correction, it is not clairvoyant. The most commonly cited reason is a rise in interest rates given recent comments from Federal Reserve officials.
The recent price action is a reminder that the price action experienced in 2017 was not normal. At the end of 2017, realized volatility fell to an all-time low (data going back to 1900)! Not only were the gains in 2017 significantly greater than historical norms, the lack of volatility was even more surprising. The conditions over the past few days should serve as a reminder that volatility is still a phenomenon that exists, markets go up and down and equity investing comes with significant risks.
The recent sell-off should be taken in context of the significant gains experienced over the past two years. The S&P 500 has gained more 50% over the past 2 years, and 38% since the US presidential election in November 2016. The only thing unusual in this recent correction is that it took so long before it finally surfaced.
I view the recent volatility as a healthy correction. The pace of gains and lack of volatility over the past year was unsustainable. I call it healthy because the underlying fundamentals of the economy have not changed. Earnings are still very strong and economic growth is accelerating. Technical price action has taken a hit but longer-term technicals are still positive. Yes, some short-term risks have surfaced, and we are monitoring them closely, but from where we currently stand, we view the correction as healthy. In addition, our Risk Odometer continues to remain positive.
Please know that we are monitoring these conditions very closely and stand ready to act. The recent dose of volatility is a reminder why we believe a tactical approach to investing is ideal. A static risk approach is great when markets go straight up, but when it experiences volatility, many like to know there is someone monitoring rapidly developing conditions. Our motto of “monitor and adapt” is an investment philosophy we firmly believe in, and gives our clients comfort during stressful periods of volatility.
We have to be careful not to make emotional decisions but remain calm and disciplined during these times. In our opinion, removing emotions and remaining disciplined is the most important element to successful investing. We preach this to our clients and it will always be at the center of our investment philosophy. I will keep you posted with any changes worth noting. Feel free to contact us in the meantime. Thank you.
About the Author
As co-founder and Chief Investment Officer, Mike brings real-time investment management experience to clients. Prior to forming FC Wealth Solutions, he spent 15 years working on Wall Street as a trader and portfolio manager for some of the industry’s most well-known firms. His previous experience at Morgan Stanley, Royal Bank of Canada and Hutchin Hill Capital gave his valuable experience in institutional money management. His focus on continual research helps him identify macro trends and strategic investments for client portfolios. His research has enabled him to develop many of the rule-based investment strategies the firm uses for managing client assets and monitoring the markets.