When looking at equity market performance over long periods of time, we see a decidedly upward bias. However, when we zoom in on shorter time periods, we begin to see periods of greater volatility. While the equity markets are not synchronized to a calendar, historically the U.S. equity market has suffered a price drop of 10% or more approximately every 18 months. It is important to note that market declines of this magnitude are not unusual and the equity market usually recovers quickly (exhibit 1). As a result, despite significant intra-year declines, the S&P 500 Price Index has exhibited positive calendar year returns in 31 of the last 37 years since and including 1980, or more than 80% of the time.
The current bull market has exhibited low volatility by historical standards. In fact, the last sizable equity market decline occurred 19 months ago in February of 2016. The lack of market volatility since then and the recent performance of some asset classes, such as emerging market stocks, downplay the risks associated with geopolitical uncertainties and other threats to market stability.
Though market volatility comes with equity investing, there are steps investors can take to cope with the stresses of market gyrations. The following are some of the time-tested solutions we have found.
Goals based investing should be the focus. After all, achieving financial goals is what is important, not the randomness of day-to-day market moves. Setting future goals will help investors understand time horizons and risk tolerances. As we wrote in our piece, Time As An Asset, investors who have more time to reach their goals can view equity markets through a longer-term lens. As time horizons increase, equity market volatility decreases and investors can have more confidence in their expected outcomes (exhibit 2).
It has been reported that CNBC’s ratings are much higher on market down days than on up days, as if viewers are looking for breaking news to explain every downturn. However, big declines are typically associated with recessions, and fundamentals do not change quickly. Rather than focus on the day’s headlines, which media outlets skillfully twist to drive ratings, investors should focus on the long-term fundamentals. The following table is a summary of our current views of the global economy and markets.
In short, we think that the current market cycle is reflective of positive global economic growth that can continue for years.
3) HAVE A PLAN
Markets can seem extremely volatile day-to-day, and that volatility can contribute to behavioral errors. Investors should be prepared ahead of time for these events. The good news is that current economic fundamentals look solid and global central banks remain accommodative. Assuming the current fundamentals hold, we think long-term investors should add to their equity allocation during normal market volatility and corrections. The most important thing is to have a process and a plan in place for dealing with volatile markets, which is an area that a financial advisor may help provide perspective. On occasion, it may make sense to raise cash, but it must be done with forethought and according to a well-defined process. We think investors should have a plan in cases of emergency, such as our Cash Indicator, that may alert investors that market fundamentals are breaking down and the best course of action might be to temporarily step aside.
This article was written by Gary Stringer, CIO, Kim Escue, Senior Portfolio Manager, and Chad Keller, COO and CCO at Stringer Asset Management, a participant in the ETF Strategist Channel.
DISCLOSURES
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.
Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.