Last year was near perfect for the markets — the S&P 500 not only gained over 21%, it also was the first year in history that the index didn’t experience a single down month. This year, however, is noticeably different. A rocky beginning may have you wondering if the long-running stock rally is over, though that’s not necessarily the case.
Before we tell you how increased market volatility actually may be a blessing in disguise, we will share how this year’s unpredictability meaningfully differs from 2017. As shown in the table below, there were only eight trading days in all of 2017 when the index was up or down more than 1%. By comparison, we experienced 23 such moves just in the first quarter of 2018!
Is Low Volatility a Bad Thing?
All else equal, it would be delightful to achieve attractive results with little or no volatility, but that’s not how markets work. In the words of distinguished economist Hyman Minsky, stability is destabilizing. Confusing, right? The belief is that low volatility can eventually snare markets because investors become complacent. Risk-taking and leverage escalate during long stretches of calm, and investors, delighting in tranquility, become ever more willing to pay higher prices. Eventually you have an environment where stocks trade at lofty valuations and overall debt levels soar. Once volatility returns, investors nervously re-evaluate the price they’ll pay to buy or even hold stocks, bonds and real estate.
So now we as investors can agree that though no or low volatility may seem appealing, it can actually lead to much harsher downturns, even full-fledged bear markets. This year won’t turn out to be nearly as perfect as 2017, though it still could be fairly attractive. Solid economic news seems to be in opposition with a variety of geopolitical issues and the Fed’s promise to raise rates. Stocks, bonds and real estate certainly aren’t cheap, yet we have seen higher valuations. As we’ve mentioned, now is a great (and perhaps essential) time for investors to embrace a broad, thoughtful approach to diversification.
Please feel free to contact any of our advisors at Fi3 if you have any questions.
While this article addresses generally held investment philosophies of Fi3 Advisors, it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.