February’s rise in market volatility is neither surprising nor alarming. Investors should take it in stride and stay the course set forth in their financial plan.
The sell-off in stocks was overdue. Equities had been on a record run of 15 consecutive positive months, as well as the longest ever period without a 3% or 5% decline.
Likewise, the magnitude of the recent losses (11% on the S&P 500) was not unusual. A 10% decline occurs, on average, every 11 months. Over the last 35 calendar years, stocks have fallen by an average of 14% at some point in the year. In fact, 2018s market volatility looks decidedly normal following an unusual period of quiet in 2017. This years average daily move in the S&P 500 is in-line with the historical average (top chart).
Bonds also have experienced higher volatility in 2018, with investment grade bonds declining 2.1%. Here, too, volatility is neither surprising nor alarming. Bonds have lost value in 17 of the last 90 years — or about 19% of the time.
Investors should expect continued volatility in 2018. As the economy continues to pick up steam, the Federal Reserve is likely to be more active in raising interest rates, which brings more uncertainty to markets. The critical point for investors is to remember that volatility and periodic losses are facts of life in investing. Indeed, they are the price one must be willing to pay to achieve solid long-term returns.