Volatility has dramatically returned to the domestic stock market after a stellar third quarter performance for major market indices. All of this year’s gains have been erased over the last three weeks. We realize volatility can be traumatic for investors, and want to reassure you that stock market volatility is normal even in bull markets. What is causing this sudden increase in volatility?
- Market volatility began to increase in early October with the increase in interest rates, which we think was driven by Federal Reserve’s guidance. The market believes the Federal Reserve could be too aggressive by increasing interest rates too quickly, and create the next recession.
- With this increase in interest rates, bond yields are starting to become more and more attractive to investors, causing money to shift from the stock market to the bond market.
- Many growth stocks are trading at very high valuation levels. It is not surprising that stocks in some of the more growth oriented industry groups like technology have been the hardest hit as investors are taking profits from these companies.
- Recent earnings shortfalls from some well-known industrial companies disappointed investors, adding to the selling pressure.
With these new concerns facing the market, in addition to the midterm elections and the ongoing trade dispute with China, we expect volatility to remain in the market, at least in the short-term. What should you as an investor do to deal with this increased volatility? The answer is very little. There are several reasons for suggesting that you stay invested in the market.
- There are very few signs of a recession on the horizon. Fiscal stimulus and a high level of confidence among businesses and consumers are keeping US growth strong.
- Pull backs of 5-10% happen frequently in general market cycles, and do not disrupt long-term performance of a diversified portfolio of stocks.
- We have had 42 days when the stock market has lost 4% or more in a single trading session. The average one year return after one of these traumatizing one day losses is 21%.
- No one can time the market. Riding out these short-term swings and staying invested in the market is the best way to achieve long-term performance goals.
- The price of the market can be very volatile, but the value of the individual businesses that make up the marketplace is amazingly stable. Short-term price changes are usually based on emotion.
From that, we conclude that we are in one of the normal 5%-10% corrections that are generally short-lived and have quick recovery times. (See attached chart.)
Thank you for the confidence you have placed in Stock Yards Wealth Management and Trust group. Please call any of the members of our team for a more detailed explanation of our economic and capital markets outlook or our investment process. We look forward to working with you in the future.
Stock Yards Bank Wealth Management & Trust Group