The start of the year has seen a resurgence of volatility in the stock market. A volatile market can bring major moves to both the upside and the downside, but is normally associated with stocks doing poorly. That has been the case thus far in 2016, as there have been a few days of strong upside performance, but the majority have brought declines.
Looking at last year was one where volatility spiked periodically, but then relative calm ensued at different times. After the major recession in 2008/2009 markets had been reasonably calm, with the exception of 2011, until volatility resurfaced again last year.
What is occurring thus far in 2016 is not really significantly different versus last year. The underlying concern in the market is slowing global growth, with China being the primary focus, because of its large size. This is an issue that will certainly linger for a period of time, but ultimately concerns will diminish.
Looking at market corrections over the last 20 years, they can be categorized either by international events, or domestic occurrences. The events that started in our country brought about more serious market declines versus the international ones.
During the 1997-1998 period there was an Asian financial crisis, which at one point during 1998 saw a 20% decline in stock prices, with the market recovering fairly quickly. In 2011 the market at one point had a drop of close to 20% on concerns of various countries in Europe defaulting on their debt.
The severe market correction in 2000 through 2002 had multiple factors, but all originated domestically. We had an overvalued market, especially in tech stocks, a number of corporate accounting scandals, the 9/11 terrorist attack, and a recession. The other severe market correction in 2008 involved a financial crisis, which resulted in a major recession.
Looking at the current environment, it is clearly being dominated by international events. The other two market corrections that originated overseas did not result in a recession occurring in our country. At this point in time, our overall economy is performing in a normal manner, and a recession appears unlikely to occur this year. Given this scenario we should not expect this market correction to be too severe.
When volatility increases many investors feel the need to want to do something. Oftentimes people panic, and unfortunately exit the market near its lows, and only get back in at higher prices. There are others who feel the need on any correction to want to buy more, which has some logic, but those individuals may find themselves over invested in stocks.
Volatile markets also give investors an understanding of how sensitive they are to risk. If someone panics over a market correction, that implies their portfolio was more risky than what is suitable. Investors need to realize that when markets are calm, they will eventually be volatile at some point, and likewise volatile markets will eventually calm down.
While markets will periodically have corrections, just as the economy has recessions at times, the unknown is what will be the duration and severity of a correction. That is why few people are successful at market timing because some corrections may be over in a few months, whereas others can take several years.
One byproduct of technology is that we have constant access to what our investments are worth, which allows some people to overly focus on their portfolio. This does not mean that we should ignore our investments, but we don’t need to check their values constantly, as doing so might cause overly emotional decision making.
In real estate people generally have a rough idea what their property might be worth, but if their property could be bought and sold instantaneously like stocks, then it might be harder to maintain a longer term perspective. That is why it is important for someone who is investing in stocks that they still keep a longer term outlook in place.
No one can say for sure how much longer this period of volatility will last. It could be nearing an end, or it could take a few more months. However, it must be noted that investing involves risk, and there are periods of time when markets do not do well, but eventually a recovery will take place.
What investors need to do, especially during volatile markets is make sure that one’s current investments are consistent with one’s long-term goals. If the market correction has brought someone’s stock portfolio below an optimal, level money can be added to the market.
However, those investors being overly stressed out by the market volatility would need to reassess how much money they can have in stocks.
