Have markets always been this volatile?
Liz Ann Sonders, the chief investment strategist and a senior vice president at Charles Schwab, warned that the level of uncertainty with regard to the president’s tweets can swing markets in either direction.” She added that the U.S. economy is still fundamentally strong and “our message to our mostly individual investors in our client base is if anything, lengthen time horizons, because over any reasonably long period of time, ostensibly there’s still going to be a connection between prices and fundamentals.”
This week market volatility worked in investors favor as President Trump tweeted multiple times that he was talking to China again about a possible trade deal. President Trump has likely realized that trade wars are not easy to win. I guarantee that when this trade war ends, the stock market will immediately turn its attention to a new worry. The market volatility has not been that much different from the past. There have been many periods when markets fluctuate around 1% a day. The CBOE Volatility Index (VIX) also known as the “Fear Gauge” or “Fear Index”, represents the market’s expectations for volatility over the coming 30 days. The VIX is only running slightly above average. It is higher than 2017, but around the same level as 2015, 2016, and 2018. It went off the charts in 2000-2002 and 2008-2009, when the economy went into a recession.
The chart below is the drawdown of the largest market drop from peak to trough during the calendar year. The stock market tends to have a few market corrections a year similar to the one experienced this month. The arrows in the chart signify the loss from the top of the market to when investors bought the dip. While it’s impossible to know the trough, markets have rebounded every time to go on to make new highs.
Past performance is not a guarantee of future results. Indices are unmanaged and not available for direct investment. Assumes reinvestment of capital gains and dividends and no taxes. | Data Sources: Morningstar and Hartford Funds, 1/19
This year the drawdown reached around 6%, which is in-line with other yearly market corrections. It’s actually very common to have a market sell-off in the summer when trading volume is low and markets are near all-time highs. Historically, September and October periods have also been volatile months.
There are other concerns that could eventually take the place of the trade war. They include the 2020 election, negative bond yields, inflation, federal deficits, a president at war with the Federal Reserve, the European economy on the verge of a recession, and global temperatures on the rise. As always, Liz Ann Sonders has nailed it, you should lengthen your time horizon and your risk tolerance because markets will remain volatile for the foreseeable future, but this volatility has not been that much different from past years.
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