- Recent stock market volatility has increased over concerns of rising interest rates, currency movements, and trade tensions. The result has been a quick and sharp sell-off in global stock markets.
- Stock sell-offs are part of normal stock market cycles, including the current bull market cycle. Investors sometimes forget this when markets go through a long period of relative calmness like the one we’ve had since early February.
- We remain optimistic about the markets and the global economy. Despite the negative impacts of higher interest rates, currency movements and trade tensions, the global economy remains very healthy and financial markets are still in good shape.
- During times of high market volatility, investors should keep things in perspective and not panic. Investors should also make sure that their investment portfolios are properly balanced and diversified.
What Happened in the Markets and Why
It’s always hard to pinpoint exactly what causes market volatility like what we’ve experienced recently. This time around, it’s been a confluence of factors including, but not limited to, interest rate increases, currency movements, and trade tensions. Regardless of the causes, the result has been a quick and sharp sell-off in global stock markets, with technology stocks and emerging market country stocks leading the way down. Investor sentiment shifted quickly from elevated levels of optimism to pessimism. One could make the argument that investors had become too complacent about the risks to the stock market, and that stocks, particularly in the U.S., got a little ahead of themselves.
The chart above shows the U.S. stock market since the recovery started in March 2009. An important thing to point out is that there are many short periods of time, including most recently, that markets pull back or “correct” from high points. These stock sell-offs are part of normal stock market cycles, including the current bull market cycle. Investors sometimes forget this when markets go through a long period of relative calmness, like the one we’ve had since early February when the last pullback occurred.
No one can predict where the stock market is headed and when a pullback will happen, but one thing we know today is that current market and economic fundamentals worldwide are solid. However, this doesn’t mean that there are no risks to be concerned about. Higher interest rates have increased borrowing costs for companies and consumers. Currency movements have hurt countries that are heavily dependent on imports, exports, and international investment. Trade tensions have slowed global trade volume. But despite all these issues of the day, the global economy in aggregate remains very healthy and financial markets are still in good shape.
What Investors Should Do
One of the best things that an investor should do in times like this is to keep things in perspective and not panic. As the chart above shows, stock markets have always gone down after reaching high points; however, they have also always recovered and moved even higher afterward.
Another thing an investor should do is make sure that their investment portfolio is properly balanced and diversified.
Having “balance” in a portfolio means having an appropriate amount of high-quality bonds to complement stocks. This can help to ensure that an investor will be able to ride the stock market wave up and down without eventually feeling the need to get out of the market to sleep at night.
Being “diversified” means spreading out investments within both stocks and bonds, so that there isn’t concentration in any one sector such as technology, or in any one country like China or other inherently volatile emerging market. However, being diversified doesn’t mean an investor’s portfolio shouldn’t hold these types of investments or sell them because they are down by a lot. Rather, diversification helps ensure that a portfolio is positioned to capture returns wherever they occur and of course, to mitigate the risk of any one sector or country selling off.
Historically, times like these can present opportunity for long-term investors. While these market conditions do not guarantee opportunities for long term investors, they give investors the opportunity to invest money that they will not need for a long time, in stocks that are a lot cheaper than they were a short time ago. Times like this also give investors that may be already be fully-invested, the opportunity to “rebalance” their portfolio by trimming from bonds and adding to stocks that have gone down significatly. If an investor sticks to this type of disciplined process, it can increase the chance of them achieving investment success and substantially growing their wealth over time.
Our Market and Economic Outlook Has Not Changed
We remain optimistic about the markets and the global economy. Almost all the various economic indicators we monitor are still trending in a positive direction, and there are no imminent signs of a global recession. (Please read our 4th Quarter 2018 Investment Perspective for more about this.) A few days (or weeks) of stock market sell-off normally doesn’t change underlying fundamentals, and this case is no different. It is still a good time to invest and be invested, but this doesn’t mean that the market is without risks. Proper portfolio design helps manage market risks so that you can sleep at night and stay invested for the long term.
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