Over the last few weeks, I’ve been talking with clients, family and friends about their thoughts regarding the stock market. The majority of conversations have revolved around recent volatility. Many people cited resources such as CNBC, Facebook, Twitter and the radio warning of volatility. But are we truly in a volatile market?
A Google search for “definition of volatility” resulted in about 92 million results so let’s stick with the traditional dictionary definitions. Merriam-Webster says the definition of volatility is the quality or state of being volatile, such as a tendency to change quickly and unpredictably. The Oxford dictionary described it as, “liability to change rapidly and unpredictably, especially for the worse.” I think many people would agree with this definition, with a focus on changes that are “for the worse.”
Let’s look at some recent S&P 500* history to see what this recent volatility has looked like. The S&P 500 had a 14-month run from November 2016 until February 2018 where it did not have a negative month in return percentage. In fact, during the month of January 2018, the S&P had its best one month performance during that 14-month run, +5.73%.
Then came February 2018, the first full trading week had two of its worst trading days. On February 5 the S&P 500 was down -4.10% or -113.19 points, and on February 8 it was down -3.75% or -100.66 points. According to the definition of volatility, that would be a quick change for the worse. But when we take a deeper look at performance, those two days do not rank in the top 20 largest daily percentage losses for the S&P 500. To be included in that top 20, the S&P 500 would have to be down more than -6.97% in a single day.
The last time we had negative consecutive monthly returns in the S&P 500 was December 2015 (-1.57%), January 2016 (-4.99%), and February 2016 (-.11%). Then in March 2016, the S&P 500 rose +6.78% and earned back everything it had lost during the previous three months. Before that we had negative returns in August 2015 (-6.03%) and September 2015 (-2.47%), but then in October 2015 the S&P 500 was up +8.41%, almost gaining everything back. The chart below illustrates the S&P 500 monthly returns going back 10 years, March 20, 2008 – March 20, 2018.
If we take a look at the S&P 500 intra-year returns going back from 1980 through 2017, as illustrated in the chart below, it averaged intra-year drops of -13.8%. While intra-year drops are the historic norm, the S&P 500 was only down -3% during 2017 calendar year. But we must remember that this is not common, you have to go all the way back to 1995 for another intra-year drop of 3% or less.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2017, over which time period the average annual return was 8.8%.
With these stats in mind, compared to the last 14 months, yes, volatility is back, but this is likely a return to what has been historically shown to be “normal” market volatility. Do not get distracted by all the noise you hear from the TV, radio, or social media. It is important to work with your advisor to create, and stick to, a personalized plan that takes into consideration your ability to assume risk and potential volatility (whether it is real or perceived).
* The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index and index returns do not reflect any fees, expenses, or sales charges. The information provided is for illustrative purposes only and not indicative of any actual investment or the recommendation thereof. The returns presented were the result of certain market factors and events which may not be repeated in the future and past performance is no guarantee of future results.
Securities and insurance products are offered through Univest Investments, Inc., member FINRA/SIPC and a licensed insurance agency. Investment advisory services are offered through Girard Partners, a Univest Wealth Management Firm. These affiliated companies are licensed subsidiaries of Univest Corporation of Pennsylvania. Products and services offered are not FDIC insured, are not a deposit of or bank guaranteed, and are subject to risks, including possible loss of any principal amount invested.