Volatility Makes its Unwelcome Return

The first quarter of 2018 was the first down quarter for US stocks since the third quarter of 2015. The 10 quarters since we’ve seen relatively steady growth. That relative calm has made the first quarter all the more jarring with multiple daily swings of 1% or greater.

Many factors have contributed to the increase in volatility seen over the quarter and the modest 0.6% decline in the US stock market over that time. Three prominent issues that have helped drive the volatility include economic reports showing strong jumps in wage growth brought fears of accelerating inflation. That in turn could lead to faster Fed interest rate increases which could possibly drive up interest rates across maturities, slowing down US growth and potentially make stocks look less appealing. Second, concerns over a global trade war have also increased recently with the US placing tariffs on steel and aluminum imports from some countries and having a back and forth with China on tariffs on a variety of goods. Finally, the potential for increased regulation of tech firms have helped drive down stock prices for several prominent tech companies.

While the recent moves in the stock market are unsettling, the level of volatility is returning to historical norms compared to the relatively smooth ride we’ve seen over the past two and a half years. There were only two days in 2017 when the US market dropped over 1% and no days were it dropped 2%. In 2016 there were 5 days of over 2% declines and in 2015 there were 6 days. In 2011 alone there were 21 days where the market fell by more than 2%. In addition, we hadn’t had a 10% decline in about 2 years. Typically there is one once a year.

What is the best way to tackle this return to more normal volatility? Ignore the day to day movement of the market and focus on your long term goals. Markets can move in any direction over the short term. Remain disciplined to your investment plan adding to what is down from other allocations that are above their targets. This automatically builds in the ability to sell higher and buy lower. There is always the risk that markets will continue to fall, but by remaining disciplined you stand the best chance of keeping yourself on course to meet your financial goals.