It’s hard to believe that a quarter of the year is already over! The market has consistently been inconsistent, zig-zagging up and down on economic news and predictions. In December, we experienced the worse market decline since the Great Depression. The S&P 500, an index of the 500 largest U.S. publicly traded companies, declined 9.2%[i]. Immediately following that grinchy Christmas, in the first quarter of 2019, the S&P 500 posted the best quarterly gain since 2009, up approximately 13%[ii]. Better yet, some analysts are predicting another surge to come.
Diving a little deeper, the Russell 2000 Small-Cap Index gained 15%[iii] during the first quarter and the tech-heavy Nasdaq that was the first to tumble in mid/late 2018 also recovered, gaining 16%[iv] during the same period. International markets experienced decent gains, too. European stocks were up 9% in the first quarter and Emerging Market stocks of less developed countries were up approximately 10%[v].
In the bond market, the yield curve inversion that spooked the market in early 2019 has flattened, as of late, with the 10-year Treasury bond yielding 2.51% and the 3 month bond yielding 2.42%[vi]. This could indicate that the fear of a future recession has subsided, or it could mean nothing at all and a recession is still looming; only time will tell.
Our stock market reiterates the sentiment that one week in the market hardly predicts where the market will go next. Further, the equity market is proving once again that volatility is the “new norm” thanks to the integration of computerized trading in the stock market. Everywhere you go, jobs that were once done by people are now done by machines, i.e.: paying for parking with one of those machines that are impossible to reach from the driver’s car seat. Well the same goes for the investment industry. Starting around the 2000’s engineers started tracking the criteria and decision making considerations that caused stock traders to buy and sell. They quantified this data into programs that imitated the trading behavior of a person. Now, computerized trading is integrated into nearly 55% of the daily trading in the stock market and up to 90% of trading on volatile days[vii]. Due to computerized trading, the swings in the market, up and down, are larger than they used to be. For this reason, many predict we’ll go through quoting the “largest gain” or “largest loss since…” for a couple of years until all the new records have been set.
Even with this understanding, volatility can frazzle nerves; especially for retired investors who can’t stand to lose their life savings. Those who stayed the course and did not lock in losses by selling equities in December are likely pleased with their discipline and subsequent portfolio recovery. Even happier might be the contrarian investors who bought equities when stocks were “on sale” in December.
If you believe in the power of capital markets, the best course of action is to try to react rationally when the market is acting wildly – easier said than done. Although it may temporarily feel better to get out of the market when the headlines are predicting doom or buy stocks when the market is hot and seems to have no cap on growth, these steps cause investors to lock in losses when the market is down and buy back into the market at a higher price after stocks have already peaked.
Buying high and selling low is detrimental to the long-term returns on portfolios and is one of the main pitfalls to a market timing investment strategy.
A more prudent investment strategy is to set your investment portfolio to match your risk tolerance. In other words create a range of how much you hope to gain, paired with how much you can withstand to lose during any given investment period. Allow your portfolio to sway within this investment range knowing that the long-term average returns of this portfolio will help you achieve your end growth goals. Whenever your portfolio is within the preset parameters, try to stay the course.
If you find your portfolio is more volatile than you expected, examine if an extraordinary market condition has occurred or if your portfolio does not match your true risk tolerance. If you need a second opinion on your investment portfolio, reach out to a financial advisor for a second opinion.