Comments on Recent Market Volatility


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Elevated stock market volatility, as we have seen since early October, brings gloomy headlines and may elicit fear in some investors. Since the beginning of October, the U.S. stock market has gone from being up nearly 11% for the year to up just 2% as of December 6th.  In Australia, our stockmarket was at one stage up 4% for the year but is currently down about 8% since January.

Most of this decline has happened during a few sizeable down days in the market, which can be alarming for some. It is an impossible task to identify and quantify the specific causes of any market decline, but there are a few leading candidates this time:

  • Concerns about tariffs and trade policy, particularly related to the U.S.-China relationship, and the impact on future U.S. and global economic growth;

  • The US Federal Reserve’s ongoing effort to raise short-term interest rates from the historically low levels that predominated since the Great Recession of 2008-09;

  • The loss of market leadership from the FAANG (Facebook/Amazon/Apple/Netflix/ Google) stocks as these companies encounter greater economic and regulatory challenges;

  • Political uncertainty around the ongoing Mueller investigation of President Trump and his inner circle and

  • The Royal Commission into Financial Services and softening house prices impacting on Australian banking stocks, which are down between 13% and 20% for the year and which comprise a large percentage of our stockmarket.

In summary, after a nearly decade-long bull run, the stock market appears to be in a period of digesting those gains and trying to ascertain what lies ahead for the global economy and corporate earnings. While unsettling, market pullbacks are par for the course and not uncommon.

  • Patient long-term investors understand that bouts of short-term volatility are inevitable, and don’t overreact to them. The average intra-year drop (referring to the largest market drops from a market high to market low during the year) has been approximately 14% for the S&P 500 Index over the last 38 calendar years. As of November 30th, the intra-year drop year-to-date for the broad U.S. market is around 10% [1].

  • Since 1980, there have been 21 years in which there has been an intra-year drop of 10% or more – so more than a 1 in 2 probability - and in 13 of those years the index ended the year in positive territory [1]

Even after the recent decline, the broad U.S. market is effectively back to July 2018 market levels and is still positive for the year. Bull markets do not last forever and are inevitably followed by some degree of a downturn, the timing and magnitude of which are nearly impossible to predict. Times like these can even be construed as healthy, in that they help flush out excessive risk-taking and remind investors that the stock market’s attractive long-term returns do not come without sacrifice and some intermittent heartburn.

And our strategy of diversification is proving its worth when equity markets are volatile. Since the beginning of December, our recommended longer term bond funds are up between 0.2% and 0.5% and global property is up almost 2.5%.

This article from earlier in the year provides further information of what to expect when investing in Stockmarkets:  https://www.stewartpartners.com.au/insights/2018/3/the-journey-of-owning-shares

And this video is a reminder of what to focus on when markets can be volatile: https://www.stewartpartners.com.au/what-we-do/investing/

None of the recent market volatility is cause for our team at Stewart Partners to adjust any client strategies or portfolios.  However if you wish to discuss any matters with your adviser team please contact us.

Author: Rick Walker

Source [1] - Dowling & Yahnke Wealth Advisers, San Diego, California USA

Rick Walker