Volatility- A Good Time to Revisit Your Goals

Investment markets have awoken from a few years of mellowness with a vengeance this year. After a long period of record low volatility, the stock market has had three times more daily 1% moves than it had all of last year. This has understandably caught your attention, so I'd like to offer a few thoughts and links to the thoughts of others to help you navigate this period.

Why is the market bouncing around so much?

In my estimation, there are two factors driving this volatility. First, the stock market posted big gains from late 2016 through 2017, rallying almost 40% over that period, so a correction (the natural process of the market surrendering some gain before resuming the uptrend) should be expected. Secondly, the unpredictability of government policy is causing rapid shifts in short-term sentiment (particularly policy directly impacting the economy like tariffs). So the combination of a natural point for markets to be weak combined with legitimate reasons for investors to be less bullish give us days like we've seen over the last few months. (For more regarding tariffs and "trade wars" check out this CNN article).

Should I be worried?

The short answer is no, but this presents a great opportunity for all investors to reexamine their goals and investment mix. The relative calm of markets over the past few years has "masked" risk to where some investors may have far more money in stocks than their risk tolerance and long-term plan might dictate, but the ride has been so smooth that it hasn't caused any concern. Now, as we return to a more normal level of risk and volatility, being overexposed to stocks can result in emotional decisions that hurt your long-term security. As you all know, I'm a big believer in diversification and balance, and I'm always looking at your portfolio mix relative to who you are and what you're trying to achieve, so this most likely isn't an issue for you. But if you've been riding this nine year bull market with a stock-heavy allocation in your 401(k) account, or made some aggressive changes in your SEI account, this is a good time to revisit that and decide if dialing down your risk (moving some money out of stocks)  makes sense. And always remember that market timing generally doesn't work, jumping in and out of the market more often will hurt your long-term finances than help. Changes should be made on the margin (like lowering your allocation to stocks from 70% to 60%, not 70% to 0%).

What's the longer-term outlook for the economy and markets?

I'm neither a market strategist nor an economist, so I'll offer up the thoughts of some "pros" on this subject. But I'd characterize the current situation as follows: we've had nine years of slow but steady recovery in the economy, and things still are moving in the right direction (unemployment is low, inflation is moderate). And markets in general don't feel "frothy" like they did in 2000 or 2007, valuations are reasonable, and interest rates are still relatively low. So right now it doesn't feel like the conditions that would trigger a serious bear market (-25% to -40%) like we saw in those prior periods.

Here are the thoughts of Schwab's chief strategists.

And those of BlackRock's strategists.

Is this a buying opportunity?
This has been the most common question I've received over the past month, which personally I find very encouraging. Uncertainty creates opportunity. Again, this probably is not the time to randomly increase risk in your portfolio, but if you've been carrying cash waiting for a pullback to get your mix more in line with your long-term plan, this very well could be the time. Markets ended the week at a key level, the 200-day moving average, and a break of that could signal more downside. That, in combination with the potential for the tariff talks with China to either worsen or show signs of being resolved, mean that the next week or two could be key for stocks. Right now the S&P500 is down about 10% from its all-time high, so we're at a point where we should be ready to put some cash to work. Of course I will be in touch with those of you who have been looking to deploy cash into stocks when the time looks good.

If you have any questions or would like to review your plan and investments please don't hesitate to reach out to me.

Sincerely,

Kevin