Crazy Volatility is Normal in Market Corrections
Last Thursday, April 28th, the S&P 500 was up 2.5%. We were feeling good. Friday (the 29th), it was down 3.6%. Monday (the 2nd) it was up 3%. Tuesday down 3%. Wednesday (Fed Day) we were up almost 4%. Thursday (May 5th), down almost 4%. The crazy thing is this is kind of normal for a downturn.
The below chart shows the rolling 30-day volatility or the standard deviation of daily moves of the market (S&P 500) going back to 1990. More sophisticated investors would know that this is similar to the VIX. Anytime you see a big spike there are green and red dots on the black line. What that is are the 25 best days (green) for the markets and 25 worst days (red) going back to 1990.
Source: YCharts
What you will notice is that they all happen at the same time- when volatility strikes.
The returns I mentioned in the opening of this memo are nothing compared to what we saw in March 2020. Back then we saw a string of daily returns for the S&P 500 that went: -8%, +5%, -5%, -10%, +9%, -12%, +6%, -5%. All on consecutive days. Back and forth, back and forth. Talk about whiplash!
Why does this happen?
Because we are human!
Here’s the thing about behavioral finance: people don’t always act rationally. I know, I know, but it’s true. Losing money is no fun. And losing money drives some people crazy. People then tend to panic when they are losing money. They panic buy and panic sell which leads to these huge swings in the market.
This is the way that it works.
Market corrections always feel uncomfortable: The S&P 500 is down ~15% in 2022 and the Nasdaq has fallen into bear market territory (-23%), reflecting the re-pricing that has transpired as markets adjust to a new interest rate environment. Market pullbacks are always challenging, but it's important to remember they are not abnormal.
While this is the first official market correction since the pandemic selloff in March 2020, historically the stock market has experienced a pullback of 10% or more once per year, on average.
Fundamentals remain supportive of the economy but with a negative GDP print for the first quarter already behind us, recession (two consecutive quarters of negative GDP growth) risks are growing.
For the first time in several years, fixed income is providing income. Short-term risk-free treasuries are yielding 2.5%. That is not bad. Eventually, investors will buy up yields like that for safety if the market continues to decline. That should drop interest rates by causing bond prices to rise helping the side of the portfolio.
In the meantime, market volatility is fairly normal and just know that we are watching portfolios closely and positioning for the best reward for the lowest risks we can attain.
As always, we are here to answer any questions you may have and appreciate the trust you place in us.
Sincerely,
Mark J Asaro, CFA
Noble Wealth Management
Disclosure: The opinions expressed are those of Mark Asaro as of the date stated on this email and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.