2017 was one of the least volatile years on record for the U.S. equity markets. The average daily level of the VIX, a measure of stock market volatility, was 11.09, the lowest annual average since the index’s inception in 1990. However, that calmness ended abruptly in early February. The re-emergence of equity market volatility, which spiked as markets became more turbulent, was largely attributable to concerns about rising inflation and interest rates in the U.S., especially given the changes at the Federal Reserve and the fear that rates will rise more aggressively than expected. In response to these fears, Treasuries tumbled and the 10-year Treasury yield hit a 4-year high of 2.93% by mid-February. The swings of 1,000 points or more in a day for the Dow that were experienced multiple times in early February caused quite a frenzy. While the downturn was unsettling for investors, the market reversal in the final hour of trading on Friday, February 9, staved off entering 10% “correction” territory. In the backdrop of the market downturn, the economy and corporate earnings remain strong, while unemployment and interest rates remain at historically low levels.
Equity market volatility along with pullbacks are a normal occurrence. Most investment managers would agree that we were overdue for some type of correction. Both the Dow and the S&P 500 were up over 20% in 2017 and continued to rise sharply in January 2018. However, the sharpness of the market sell-off, partly driven by algorithm-based trading, spooked investors. These high-speed, high-data trades have become a reality for global markets. Despite the largest point loss in history for the Dow on Monday, February 5, the decline on a percentage basis did not even make it into the record books for the top 20 historical sell-offs.
While short-term stock market volatility is unnerving, it is part of the trade-off for long-term price appreciation experienced by stock market investors. It is extremely difficult to time the market – no one can predict what it will do in the short term. Disciplined investors should sit tight and stay the course, focusing on their long-term strategies.
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