More Stock Market Volatility to Come?

This past weekend my family and I had a chance to visit friends who recently moved to a place steeped in history, Williamsburg, Virginia. The quiet, car-free street of Colonial Williamsburg provides a stark contrast to the modern-day engineering marvels just down the street, Water Country USA and Busch Gardens. It got me thinking that the last few weeks of the stock market seem to mirror the drive (or walk) through Williamsburg.

Up until a few weeks ago, the stock market was relatively “quiet”, slowly grinding higher with no one paying too much attention. Just like the short drive that takes you from quiet Colonial Williamsburg to the shrieks and screams of Water Country USA and Busch Gardens, the calm and quiet of the market has suddenly been replaced by loud cable news experts pointing to big red numbers shouting that everything is crashing down around us. Maybe that’s a little dramatic, but the echo chambers of social media feeds can make stock market volatility seem much worse than it is, or make it seem like this is something new or different.

If you’re having trouble keeping a cool head about your investments, take a deep breath and consider market history and the true purpose of your financial plan. Today’s losses might seem scary, but if you can clear your head of all the noise and stay focused on what’s important, your investments will yield a great Return on Life.

A recent Wall Street Journal article highlighted an interesting fact about one day market declines of more than 3%, which happened this month. Since 2010, there have been five years in which the stock market had one day where it dropped 3% or more. Of those five years, there was only one year when that first 3% drop was the only significant drop that year, meaning in four of the other five years, one 3% drop was followed by subsequent drops of 3% or more. Therefore, the odds would suggest that another drop of 3% or more is likely in 2019. What should you do? While every situation is different, much like Colonial Williamsburg, history can teach us much about how to respond.
In 2010, there were five days where the stock market declined by more than 3%, however, at the end of the year, the S&P had a calendar year return of 15.06%. In 2011, there were six days where the stock market declined by more than 3% but had a calendar year return of 2.11%. This is not as good as in 2010, but it demonstrates that the market is resilient.

Recency bias convinces many people that this volatility is different, and the sentiment is amplified by non-stop cable news and twitter feeds.  I carry a small stock market chart with me that shows the stock market return since 1926, through various wars, the gas shortages in the 1970s, Black Monday in 1987, 9/11, natural disasters, and the housing crisis of 2008. Viewed through the wider lens of history, the long-term trajectory of the stock market has continued to point upward, no matter what the world and panicky investors throw at it.

I’m not going to try and predict whether the recent stock market volatility is the beginning of the end for the current bull market. However, I do know this: fretting about normal market volatility only leads to bad financial decisions and a distorted view of what your money is really for. We’ve found that the sooner folks start focusing on living the best life possible with the money they have, the greater their Return on Life is throughout the financial planning process.