Stock Market Volatility – What’s with the rollercoaster???

Stock Market Volatility - What’s with the rollercoaster???

Brandon Hobson, CPA | Director of Investments | PracticeCFO

  The U.S. stock market has experienced high volatility since the start of October, particularly to the downside. Stock market volatility is associated with big swings in either direction. With the runup in the market over the last couple of years, it’s easy to forget that volatility is normal and that it works in both directions. It is important to remember that volatility moves in cycles, like the stock market, with periods of low volatility followed by periods of high volatility and vice versa. High volatility can lead to a stock market correction. A stock market correction is defined as a drop of at least 10% from a recent high. Periodic corrections can be healthy for the stock market, keeping asset valuations from getting too overheated and creating opportunities to buy value stocks at a discount. The stock market on average has a correction once a year, lasting between 3-4 months. Some recent events that increased volatility and spurred the most recent correction include interest rate hikes by the federal reserve, increasing inflation, global trade conditions, and the mid-term elections. In our view, this is a healthy correction and there is no concern with the long-term trend of the market. If stock market volatility is inevitable, and you can’t stop it from occurring, how do you deal with it? Below are some recommendations:
  • Don’t consistently check your investment performance in a volatile market. It will lead to more anxiety over short-term price fluctuations.
  • Maintain proper diversification. Some asset classes have the potential to gain or stay flat when others drop. Our investment models are well diversified to help mitigate losses.
  • Don’t lose sight of your long-term investment strategy. If your money is invested in a retirement plan, you likely won’t be tapping into it in the near-term. It is important to stay the course. Markets recover, but if you pull your money out of the market you have a 0% chance of recovering.
  • Don’t wait for a downturn to understand your ability to withstand losses. Many investors think they have a high-risk tolerance, until they encounter a market downturn. This could cause you to abandon a sound, long-term investment strategy at precisely the wrong time. It will take longer to recover from a downturn if you sell low and reallocate to a more conservative strategy.

Investment Strategy - Considering Business Cycles

It is difficult, even impossible, to predict what will happen in the market day to day, but we can analyze equity sector performance to get a good idea of where the overall economy stands and where it’s headed. History shows that certain sectors perform better than others at different stages in the business cycle (i.e. early cycle, mid-cycle, late-cycle, recession phase). At PracticeCFO, we consider this in our investment strategy, specifically when determining which sectors to invest in or avoid. The U.S. economy is currently in the mid to late-cycle phase. We created a Core-Satellite model, which consists of a passive ETF/Fund that tracks a U.S. Broad Market index (core position), like the Russell 3000, and several defensive sector ETFs (satellite positions) that we expect to outperform relative to the entire U.S. equity market. Want to hear more about our investment strategy? Contact us.
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