For anyone who’s been living under a rock since the first of the year, here’s some reasons why recent stock market volatility has picked up significantly:
- The spreading of Coronavirus and its effects on the economy.
- The Democratic primaries and a variety of front-runner outcomes whose potential effect on the economy would be unknown.
- In general, it is a presidential election year.
- Stock market valuations are very high.
- Bond yields are at historic lows.
While these aforementioned reasons may provide for some rationale behind recent increased volatility, or noise, within the global trading markets, it is important to understand what effects this may have on your own physical and mental well-being. Investors don’t like uncertainty, and that’s exactly what we have right now. Before I explain that, let’s first talk about what’s going on.
How far, and to what extent, Coronavirus works its way into our social and economic system, is unknown. The Centers for Disease Control and Prevention (CDC) states that a wide-spread outbreak of coronavirus is a possibility, but not a certainty. Investors selling stock positions (in every sector) because of a virus seems to be short-sighted for all but those investors who need the money now. And those investors shouldn’t have been invested in stocks in the first place if their investment timeline was that short!
The current Democratic primary election, as well as 2020 being a presidential election year, brings typical election year volatility. And, you guessed it, it’s due to uncertainty! According to a study by US Bank who examined results over the past 90-years, presidential elections have shown patterns of muted, or underperformance in the year leading up to the presidential election.
Stock valuations have been hovering near the high-end of historic ‘perceived’ value to investors. Likewise, US government bond yields have now fallen to all-time lows (the US 10-year note closed at 1.33% today). With these two opposed investments stretching on each end, investor sentiment may be questioning how much more they (stocks and bonds) can move in each direction. This also creates an uncertainty…adding to a possible investor sentiment that cannot be overcome by rational perspective.
Market volatility has a funny way of finding a direct connection to the nervous system of unseasoned investors. Effects such as upset stomach, loss of sleep, headaches, low energy, and tense muscles can all be experienced from merely worrying about the loss of value in your investments. This is the same kind of stress induced by exposure to a) a life-threatening event, or b) a ‘must do’ scenario where you have to act in an uncomfortable manner. However, there are significant differences when it comes to investing.
Every investment you make should be accompanied by a goal that assumes a certain amount of risk to go along with its timeline. Retirement accounts/investments should have the longest-term focus whereas performance is measured over decades, not days. These accounts can assume a commensurate amount of risk and volatility since an investor has time to recover from steep drops in value. By contrast, checking, saving, and money market accounts used to pay your bills or other incidentals should have the shortest timeline and carry no risk.
If your account is invested in a fully diversified portfolio that provides the right amount of volatility associated with the timeline for your particular goal, you should be fine knowing you have time to ride the ups and downs of the market to get there. And while past performance is not indicative of future results, I want to leave you with this undisputable fact: On February 27, 1950, the S&P 500 index was 17.59. Today, 70-years later and after one of the worst 2-consectutive day sell-offs, the S&P 500 index closed at 3,128.21…a 17,684% increase!!
Contact me if you have any concerns about your portfolio. I am here for my clients.