What should investors know about a recent volatility?

Published 3:44 pm Friday, March 16, 2018

As you may have heard, the stock market has been on a wild ride lately. What’s behind this volatility? And, as an  investor, how concerned should you be?

Let’s look at the first question first. What caused the steep drop in stock prices we experienced on a few separate days? 

Essentially, two main factors seem to  be responsible. First, some good economic  news may actually have played a significant role. A 17-year low in unemployment and solid job growth have begun to push wages upward. These developments have led to fears of rising inflation, which, in turn, led to speculation that the Federal Reserve will tighten the money supply at a faster-than-expected rate. Stocks reacted negatively to these expectations of higher interest rates.

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The second cause of the market vola- tility simply appears to be a reaction to the long bull market. While rising stock prices lead many people to continue buying more  and more shares, some people actually need to sell their stocks – and this pent-up selling demand, combined with short-term profit-taking, helped contribute to the large  sell-offs of recent days.

Now, as for the question of how concerned you should be about this volatility, consider these points:

Sell-offs are nothing unusual. We’ve often experienced big sell-offs, but they’ve  generally been followed by strong recoveries. Of course, past performance is not  a guarantee of future results, but history has shown that patient, persistent investors are often rewarded.

Fundamentals are strong. While short term market movements can be caused by a variety of factors, economic conditions and corporate earnings typically drive performance in the long term. Right now, the U.S. economy is near full employment, consumer and business sentiment has  risen strongly, manufacturing and service activity is at multi-year highs, and GDP growth in 2018 appears to be on track for its best performance since 2015. Furthermore, corporate earnings are expected  to rise this year.

So, given this background, what’s your next move? Here are some suggestions:

Review your situation. You may want to work with a financial professional to determine if your portfolio is helping you make the progress you need to achieve your long-term goals.

Reassess your risk tolerance. If you were unusually upset over your investments’ loss of value during the market pullback, you may need to review your risk tolerance to determine if it’s still appropriate for your investment mix. If you feel you are taking on too much risk, you may need to rebalance your portfolio. Keep in mind, though, that by playing it safe and investing heavily in vehicles that offer greater protection of principal, but little in the way of return, you run the risk of not attaining the growth you need to reach your objectives.

Look for opportunities. A market pullback such as the one we’ve experienced, which occurs during a period of economic expansion and rising corporate profits, can give long-term investors a chance to  add new shares at attractive prices in an  environment that may be conducive to a  market rally.   

A sharp market pullback, such as we’ve  seen recently, will always be big news.

But if you look beyond the headlines, you can sometimes see a different picture –  and one that may be brighter than you  had realized.