On Wednesday, October 24th, equities pulled back sharply, as mounting concerns over global growth, corporate earnings, and rising rates left global equities down nearly 3%. The S&P 500 Index has now fallen in 13 of the past 15 trading sessions. October’s market volatility has brought equity indices down nearly 10% — or more — from recent highs. Because of last year’s low volatility, the market fluctuations in 2018 have seemed extreme.
In light of the recent surge in market volatility, investors may be wrestling with the recent decline and wondering what (if any) changes should be made to portfolios.
Where do markets currently stand?
The October market pullback has resulted in negative returns for the month for nearly all asset classes.
What caused the most recent market pullback?
No single culprit is to blame, though a combination of factors have contributed to the pullback — namely, concerns over global growth, corporate earnings, and rising interest rates.
Further compounding recent market declines is the technology sector. On October 24th, the technology-heavy NASDAQ Composite Index dropped 4.4%, which was its largest single day decline since August 2011. The prices of Facebook, Amazon, Microsoft, and Google parent Alphabet all fell by more than 5% for the day, leaving the group with double-digit declines for the month of October.
Is such a market pullback normal?
Yes, though it may not necessarily feel like it. Last year was a period of remarkable (and nearly unprecedented) low volatility, which makes 2018 market volatility seem extreme.
To put the recent market decline into perspective, the S&P 500 Index since 1980 has experienced an average intra-year decline of nearly 14% (median decline of 10%), yet the index has still produced positive returns in 29 of the past 38 calendar years. So while investors may be inclined to sell equities following a pronounced market pullback, the S&P 500 Index provides a great example of how costly such a move could be.
In light of the current market volatility, how should investors react?
1) Acknowledge risk – Investors should recognize that long-term investing entails market volatility. Taking risk isn’t fun, though for most investors, it is necessary to meet long-term objectives. A prudently diversified portfolio should factor in long-term objectives, risk tolerance, and time horizon.
2) Revisit objectives – In times of strong market performance, investors may underestimate their risk tolerance. Market pullbacks can be a good time to revisit long-term objectives relative to the risks being taken in the portfolio. If objectives are the same today as they were several months ago, investors should not let the current market pullback dictate changes to a well-constructed investment plan.
3) Focus on the long-term – Given the media’s heightened attention to the short-term (“Dow Plunges,” “Equities Plummet,” “What Investors Should Do Now,” etc.), it might feel like a prudent course of action to make significant portfolio changes in the midst of a sharp market downturn. However, such moves are often ill-timed and can significantly impair the effectiveness of a prudently designed investment plan.
As Wall Street Journal columnist Morgan Housel once wrote, “Short-term thinking is at the root of most investing problems. If you can focus on the next five years while the average investor is focused on the next five months, you have a powerful edge. Markets reward patience more than any other skill.”
We continue to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to your goals and time horizon. Despite elevated uncertainty, we do not find compelling reasons at this time that would justify overriding our asset allocation methodology.
If you have questions about the impact of the market pullback on your portfolio, please contact an advisor at Fi3.