If you’re the kind of person who likes to worry, then October has given you plenty of stimulus. After yesterday’s 3.1 percent drop in the popular S&P 500 index, the index has lost 8.8% in this month alone, wiping out all the gains that we’ve enjoyed this year, putting the index in negative territory. The once-soaring Nasdaq Composite Index of technology companies tumbled 4.4% on the same day.
In times when the markets are dropping, even if they haven’t hit correction territory yet (that would be a 10% drop), the media needs to find a narrative, and you hear all sorts of theories. Corporate earnings have nowhere to go but down. The tariffs are slowing down economic activity. Interest rates are rising.
After a long period of relative calm in the markets, the increased volatility over recent weeks has resulted in renewed anxiety for many investors.
Since February, the US stock market has experienced some ups and downs resulting in many investors wondering what the future holds and if they should make changes to their portfolios. While it may be difficult to remain calm during a volatile stock market, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.
The recent drop in the stock market has most people looking for answers. What is going on? Why have stocks dropped so much in such a short amount of time? Market-timers and short-term traders move markets in the course of hours, days, or even months, but we believe the long-term profitability of the companies we own is what drives long-term stock returns. We also know that the kind of movement we are currently experiencing is little more than noise that can safely be ignored. 10% declines in the market on average will happen every year. We have been insulated from this large a decline since the last drop in 2008-2009. There has been a long continuous run up since then with little volatility. In 2017, there were only 8 trading days when the US stock market went up or down by more than 1%. This low volatility and gradual positive gains may have lulled some into unreasonable expectations for stock market performance.