Market Volatility Update
The last few days have been tough for investors. Most of the time markets are driven by economic fundamentals (i.e. earnings, valuation, growth, unemployment, inflation), but then there are pockets of time where fear and greed overpower fundamentals and we see some pretty severe short-term shifts. Recently economic fundamentals have been strong, unemployment is low, inflation is low, interest rates are low (although rising), earnings are high, and future earnings are expected to be high. Over the last week, fear of rising interest rates, higher inflation, and lower (but not Low) future earnings have taken hold of the markets without much actual change in economic data.
At times like this it helps to “look under the hood” a bit to gain a better understanding of what is really happening versus simply turning on the TV and seeing red. The US is in a mid-term election cycle which historically is volatile. From our friends at Bespoke:
The period between late August and early November is typically volatile for equities, but mid-term years only add to the volatility.
- The period between the close on 8/24 and Election Day during mid-term election years has historically been positive as the S&P 500 has seen an average gain of 2.07% (median: 2.09%) with positive returns two-thirds of the time.
- While the performance from point A to point B has been positive, it hasn’t been a straight line. During this period, the S&P 500 sees an average maximum drawdown of 6.7% (median: 5.7%). Down 6.4% at close today from late August high.
- In one-third (six) periods, the S&P 500 has seen a drawdown of at least 10%, while there was only one period where it never closed below the 8/24 closing level.
- While the low of this period ranges all over the map, on average, the S&P 500 sees its low for this stretch on 9/22.
- From the pre-midterm low through Election Day, though, the S&P 500 has seen an average gain of 9.5% (median: 8.11%) with six periods where it rallied more than 10%.
This has, at least so far, been a rotation from growth-oriented sectors that have enjoyed significant outperformance over several months (technology, consumer discretionary), to the value-oriented ones that have not (utilities, consumer staples). For example, Amazon is down -16% since it’s Late August high, meanwhile AT&T is up 2.2%.
Tempering Emotional Reactions
Let us not forget we have been willing recipients of very low volatility for several years. An increase in market gyrations does not necessarily mean negative returns will result. However, we do believe the low volatility environment we enjoyed with an accommodative Federal Reserve are behind us. Although a smoother ride would be more enjoyable, we have to remember that volatility is part of investing and staying the course during these times is important for future returns. Over time, a diversified portfolio aligned with your financial goals is the best strategy regardless of whether fear or greed are in control.
As always, if you have any questions or concerns, please reach out to us online or at (972)-931-3818.
Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (972) 931-3818 or at firstname.lastname@example.org.
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