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Riding Beneath the Waves - A Long Term View of Market Volatility

| December 05, 2018
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Waves and Froth

The month of November exhibited a continuation of uncertainty in markets.  The month started off with a strong recovery for stocks from a terrible October, followed by another drop, then another recovery toward the end of the month.  Net result was an ok, but not stellar month for stocks.  Meanwhile, bonds started to recover a bit, as expectations regarding the pace of future rate increases started to come down.  On the whole, it was not a bad month for investors. Investment management clients should see their month end reports added to the portal today or tomorrow.  

As far as volatility goes, we are clearly not out of the woods.  As I write this in early December, it seems that turbulence is continuing. The market was up strongly last week and through Monday, then gave back much of those gains yesterday.   

Despite market uncertainty, the broad economic backdrop in the US still appears solid.  Corporate profits are strong. Employment is strong.  Personal incomes are finally growing.  Recent decreases in the stock market have made stocks look a lot less expensive, which is probably a good thing, particularly for new investors.

Unusual Volatility – or Back to Normal?

I commented several times last year regarding the incredibly strange market conditions that resulted in a perfectly smooth upward trajectory for the stock market.  Throughout the year, there was not so much as a single move down of 3% or more.  On average, markets experience a downward correction of 10% every 10 months.  2017 set all kinds of records for market complacency.  

Here is a look back at what 2017 looked like.

2018 reflects a return to volatility and uncertainty, clearly illustrated by comparing above to a chart of market action year to date through this morning:

What a difference a year makes! 

But in truth, this year’s chart looks a whole lot like 2015 or 2016…or most other years.  It is not 2018 that is the outlier for market volatility, it is 2017 that was the outlier for its lack of market movement.

Dealing with Market Waves and Turbulence. 

One can think of daily market turbulence to be much akin to waves and turbulence on the ocean.  On the surface, traders and market actors are churning the water to a froth as they try to predict how future events will impact corporate profits.  Will we have an escalating trade war, or will back for a while?  Will the EU and Britain work out a trade arrangement?  Will Italy leave the Euro?  Future events are not knowable of course, so traders change their minds based on the constantly changing news flow.  All the flailing around is what churns the surface water of the market so severely.

But 99.99% of the water in the ocean lies far below the surface and is completely unaffected by wave action on the surface.  What really matters to long term investors has little to do with daily changes in stock and bond markets.  Despite the latest presidential tweet or Brexit discussion, companies continue to do business and earn profits (record profits in 2018, again).  They continue to pay dividends to their shareholders, and to buy back stock – to the benefit of their shareholders (including you!). Bonds continue to make interest payments to their bondholders.  Long term investors constantly reinvest dividends and interest to buy more stocks and more bonds, and important driver of long term investment return.  Although there may be an ebb and flow to the profits earned by companies and the interest paid from a bond fund over time– the chaotic turbulence on the surface is not felt all that much by the passengers on a submarine - nor will it matter that much in pursuit of your long term goals.  

Poke your head above the surface for a moment (by taking a look at the daily ups and downs in your portfolio statement) and you might get a bit seasick.  But the solution is simple.  Dive back under the surface and ignore the waves.   Even just backing off 10 years and looking at performance of the stock market will help one to see the futility of worrying about today’s choppy sea.  Here is the stock market over the last 10 years:.

From far beneath the surface, recent market action seems to be just another mild bump on the journey to prosperity.  Makes it a whole lot easier to enjoy the journey when you can ignore the waves!  

For those who can't help but think "How Can I Ignore the Current Value of My Investments" - I ask only this.  Do you remember what the value of your portfolio was on this date i5 years agao?  Ten years ago?  Will the value of your portfolio today be at all relevant to you five years from now?  Ten years from now?  Not really.  Nor does today's market action tell us much about what the portfolio will be several years in the future.  So indeed, ignoring today's value probably IS the best approach for long term investors simply because it doesn't matter all that much to your long term financial plan.  (of course, money you do need in the near future should be handled differently than long term investments, but that's a different story!) 

   

 Past performance does not predict future results. Investments in stocks and bonds can lose money and are not guaranteed.  

 

 

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