Buckle your seat belt, volatility is back. Last year lacked turbulence, rewarded diversification and invited complacency but 2018 is a whole new ballgame.
Price swings of 500 points or more on the Dow Jones Industrial Average are now commonplace causing anxiety for many investors. Yes, the future is more uncertain but when was that any different?
The economy is clipping along at about 2% growth, the Fed is slowly raising rates, many Americans are enjoying higher incomes, lower taxes, and it appears there is no recession in sight.
But wait, there’s a new sheriff in Washington who likes to Tweet and we find ourselves on the verge of a trade war.
Markets despise uncertainty and we’ve got lots of that right now.
In recent weeks, President Trump announced the US will impose steep tariffs on steel, aluminum and a host of other imports fueling concerns over protectionism and a possible trade war with the largest holder of US Government Debt: China.
It was only weeks ago that investors embraced tax cuts and the paring back of many regulations but trade tensions inject uncertainty and a host of unknowns that are tough for investors to swallow. Tariffs invite retaliation and could spark a tit-for-tat trade war hurting all but a few. All of this saber rattling brings uncertainty into a formerly sanguine market.
Meanwhile, our friends in Silicon Valley have entered the fray with data breaches, car crashes, and a war of the words between the President of the US and the CEO of Amazon.
CNBC, discount brokers and day traders care about minute-by-minute swings in stocks prices. Long-term investors should not.
Let’s step back and take a peek at some relevant data from our friends at Dimensional Fund Advisors:
• The average intra-year pullback (peak to trough) for the S&P 500 Index since 1980 has been 13.7%.
• Half of all years had a correction of at least 10%.
• Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
• The average total return for the S&P 500 during a year with a correction was 7.2%.
The evidence, once again suggests shutting down your favorite news sources. The perspective of the past markets would suggest this too shall pass.
Focus on what you can control, like maintaining your health, spending time with the people you love and living life to the fullest.