The Return of Volatility
February saw the return of volatility in stocks after an unusually calm 2017. Global stocks had their worst month since January 2016, the S&P 500 experienced its worst single trading day since 2011, and the VIX hit its highest levels since August 2015. Although these events made plenty of headlines, what they actually mean for the portfolios of long‐term investors did not get as much attention.
Much of the media focus has been on the CBOE Volatility Index, the VIX, which is a popular measure of expected volatility based on prices for S&P 500 options. During February, the VIX hit a two and a half year high and the S&P 500 had more days with moves of greater than 1% than all of 2017. Although this bout of volatility coincided with a broader market selloff, this relationship is not causal. In fact, since 2004, three of the five years with the highest average VIX level corresponded with S&P 500 returns greater than 15%. So although increased volatility can be unnerving, it is important to remember that it does not inherently mean lower returns.
As mentioned before, February’s spike in volatility initially coincided with stocks experiencing significant drawdowns for the first time in over a year. The S&P 500 dropped more than 10% in two weeks and the selloff spread to markets around the world. However, this pullback was not unprecedented or even uncommon as markets average a drawdown of at least 10% once every year. Additionally, it is easy not to notice that markets recovered most of these losses just as quickly despite volatility remaining elevated relative to a historically quiet 2017. Most of the public attention focuses on the downside, which makes it even more important to view these short-term trends within their historical context. This can help prevent common mistakes such as attempting to time the market.
At Savant, we focus on maintaining globally diversified portfolios. This allows our fundamental investment philosophy to remain unchanged during times of increased volatility or market pullbacks. However, if the recent market volatility has you worrying about your portfolio, now may be a good time to meet with your financial advisor to revisit your personal risk tolerance. Ensuring that your asset allocation is aligned with your goals and risk tolerance can help provide peace of mind and ensure you are on the best path to building your ideal future.
Read our complete February 2018 Economic & Market Commentary for Market Returns Year-To-Date, Market Returns Longer Term Annualized, Economic Indicators, and an Appendix.
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Morningstar Direct, JP Morgan
This is intended for informational purposes only and should not be construed as legal, investment or financial advice. Please consult your legal, investment and financial professionals regarding your specific circumstances.