The Mysterious Case of Missing Volatility
By Jordan Cole, CFP®
2017 was a mysterious year in the U.S. stock markets. Volatility, the constant up and down of stock markets, virtually disappeared. For longtime investors, it was as if the waves at the beach suddenly died down and the Pacific Ocean was flat as far as the eye could see. As of January 2018, the U.S. stock market had gone 394 trading sessions without going down 5%, the longest streak in over 20 years. The S&P 500 was up every single month of the year. WSJ Market Data Group measured the daily percentage change for the S&P 500 as 0.3%, the lowest since 1964. Goldman Sachs proclaimed it to be the lowest measured volatility since the Great Depression, calling low volatility “the defining characteristic of the U.S. Equity Market in 2017.”
Like a mild, sunny day at the North Pole, this tranquil environment was doomed to end. The stock market moves up over time, but not in a straight line. If you met with us in the second half of 2017, you heard us waving the warning flag to prepare for volatility to return because, just as waves are the default setting of the ocean, volatility is the default setting of the stock markets. As your advisors, we prepared for this, knowing that it was only a matter of time. We took some risk off the table in U.S. stocks, adding funds designed to fare better in a falling stock market. We didn’t know when the volatility would return, and we certainly didn’t know what would set it off, but that it would return was inevitable.
We didn’t have to wait long in 2018 before our not-very-bold prediction came true. January 26th ended up being the peak of the market for large U.S. stocks, and, at the bottom, the S&P 500 was down just over 10%. This, of course, created a deluge of over-the-top headlines about the end of the bull market and the death of the U.S. stock market. While it’s never pleasant to have a 10% downturn, how unusual is it? Looking back to 1980, it’s incredibly average. If you look at each calendar year and identify the largest S&P 500 drop within it, you’ll find the average correction is just over 14%. Over the past century, 2017 and its amazing lack of volatility was much more unusual than 2018’s bumpy start.
Since this volatility returned, many investors have started to wonder about its impact and what changes they should be making based on it. However, one of the principles of investing is to prepare before changes hit rather than being reactive to those changes. At Sage, we assist you in implementing proactive strategies that best fit you, year after year, market cycle after market cycle, to help you reach your long-term goals.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.