A Note on Volatility

The below was previously sent to clients on February 5, 2018. What a difference 10 days makes!

Volatility has returned to the equity markets. It has been about two years since the major equity indices have seen this type of volatility, so it can feel like quite a shock. The first few days of the equity market decline were attributed to rising interest rates, but today’s selloff occurred in the midst of falling rates and no major news. As of this writing, the benchmark S&P 500 is down nearly 10% from its all-time high just 10 days ago. It is a large enough decline to take us back to…. December prices. This is an important point: equities have had an incredible rally over the past two years and it is not surprising that we are seeing some volatility and a pullback. Arguably, it would be more surprising if the market marched higher unabated.

There may be wilder swings to come (perhaps a snapback rally or a continued steep decline), but a few days or weeks of volatility should not be cause for panic. Despite the change in volatility regimes, many things have not changed:

  • Markets move up and markets move down, sometimes for fundamental reasons and sometimes based on nothing more than investor sentiment.
  • To generate returns, investors must expose themselves to risk. Today’s volatility is the price equity investors must pay for the generous returns of the past two years.
  • As we have said in the past, the time to make portfolio adjustments is before markets move. By the time the market drops 5% in a matter of minutes, it is too late to adjust your portfolio. Rather, select an appropriate asset allocation and perhaps reduce risk when markets are euphoric; you may miss out on some upside, but will be better equipped to exploit opportunities when the tide turns.

Notwithstanding the above, we are not dismissive of the recent declines. We are monitoring global markets and incoming data and are prepared to change our approach and strategy as the data dictates. If you have questions, concerns, or would like to discuss market specifics, please do not hesitate to reach out.