Volatility Is Back
The market swings of early this year have been a rude awaking that stocks don’t always go straight up. 2017 will go down as one of the lowest volatility years in history. These recent moves are in line with normal fluctuations and always provide a healthy reminder of the downside stocks have.
The beginning of 2018 started off with a nice rally as the S&P 500 moved up over 7% in January only to fall 10% over the next two weeks. Since that time, the market has stabilized but not fully recovered. Corrections are usually a great buying opportunity, but there are several items to consider. First is to understand what caused the market correction and if the volatility will continue. The primary driver of this selloff was fear of inflation from wage pressure and uncertainty of how the new Chairman of the Federal Reserve will respond to higher inflation. The tool most often utilized to fight inflation is raising short term interest rates.
The expectation in January was the Fed would raise rates 2-3 times, but now the market has been pricing in a potential 4th rate hike. The interest rate on the 10 year Treasury bond moved from 2.4% to 2.8% as a result. This higher cost of borrowing will eventually slow inflation (and economic growth) but not significantly until rates exceed 3% to 3.5%. Core inflation is still running around 2% so it is doubtful runaway inflation is in near future.
Another item to consider is your own portfolio allocation. Do you have enough cash savings for an emergency or rainy-day fund? Do your current investments have too many/too little stocks? How about your ability to withstand the market fluctuations? If you’re comfortable answering these questions, it is likely a good time to increase your stock exposure. We believe 10% corrections are a nice entry point if you have a long enough time horizon. We don’t know when or if the market will recover but if history is any guide it is worth considering.
“Volatility Is Back” was published in the April 2018 issue of Life on the Green magazine, a social publication for the residents surrounding The Woodlands, Country Club, Player Course, where Dan is a resident and is a featured monthly contributor.