Stock Market Volatility

Stock market volatility is not new, but it has been in hiding for a while. Over the past couple of weeks, we’ve seen the S&P 500 decline by approximately 10.5%. After a long period of the markets seeing gains without a correction, it’s only natural to have some concerns and fears about it. I thought I’d write a brief article to put some perspective on the topic.

Stock market corrections are a normal occurrence. During Bull Markets periods, it’s normal to see the market pull back a little bit before regrouping and moving forward again. A correction is defined as a 10% drop for a market index or an individual stock from a recent high. For the US markets, measured by the S&P 500, corrections normally occur every 12 to 18 months. And everytime they’ve occurred in the past, we’ve recovered and moved on to eventually set new highs again.

The reason there seems to be such a strong reaction currently is that we haven’t seen a correction in quite some time. It’s been 4 years since the last movement of this magnitude. In Late July of 2011, the S&P 500 reached a near term high of 1347. At that time there were starting to be some fears about the Euro economy, with fears brewing of issues in Greece, Spain, Portugal and Ireland. The US markets responded by contracting about 15% over the next few weeks. The S&P 500 bottomed out on August 15, 2011 at 1122. Things stabilized and the S&P 500 was back above the pre-correction levels by late January 2012.

Since that time, the markets have been chugging along with only small pockets of relatively minor volatility and reached a closing high of 2126 on July 13th of this year. From the 1347 level prior to the correction in July/August of 2011, that’s a 58% increase, from pre-correction peak 2011 to pre-correction peak 2015. If I look at the 2011 lowpoint of 1122 on August 15, 2015 to today’s close of 1893, it’s a 68% increase. Or if we look at the 2011 lows of 1122 to the July 2015 peak of 2126 in July 2015, it’s a nearly 90% increase without a correction along the way. In summary, we are long overdue for this correction in the market.

I believe the most dangerous words an investor can use are “This time is different”. The cause of a correction may be different, but everytime the market has gone down in the past, it eventually goes on to chart new territory again. I don’t have any reason to think this time will be any different from any market correction we’ve seen in the past. I believe this is just a normal, Bull market correction. The fundamentals of the US economy are relatively strong. We’re seeing job market growth, a strong housing market, low inflation. Even if I’m wrong and we are entering into a recession and a bear market, we will live on. Our economy is resilient, we as a society are resilient. We will live through it, and move on to set new highs again. There’s no cause for panic.

I think the best questions you should ask yourself in situations lke this is “What am I investing for? Does this change anything? How does this really impact me today and in the future?” If you look at the answers to those questions, I would expect you can get beyond the emotions of the current volatility and make better sound long-term decisions with your investments. And remember, for those that treat the financial markets like a casino, they should expect that the market will treat them like a gambler. For real long-term investing, there are risk, but smart investing is not like gambling.