The stock market has been spooking investors lately. And it’s no wonder. As portrayed by the frenzied financial media, the market swings have looked wild.
On Oct. 10, for example, the Dow Jones Industrial Average experienced its worst two-day drop since February. This drop was preceded by four days of daily swings of at least 100 points. And the market performance grew even worse. On Oct. 15, the Standard & Poor 500 Index dropped briefly into negative territory for the year.
In the midst of the gloomy market news, however, the Dow Jones Industrial Average experienced its second biggest gain of 2014 on Oct. 17, marking the end the market’s wildest week in three years. Despite all the turbulence, the Dow and the Standard & Poor’s 500 Index are now just 4.4 percentage points and 3.6 percentage points off their all-time highs recorded in September.
The volatility that we’ve seen this fall, however, isn’t actually unusual. The media, however, portrays it that way because it makes for more interesting news.
In fact, the current swings in the markets pale in comparison with gyrations during darker financial times in the recent past. A tool called the VIX is a widely used measure of market risk and is often referred to as the investor fear gauge. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows what the market expects in terms of volatility in large-cap stocks over the next 30 days.
The relative lack of volatility in the market over the past three years is what is really unusual. The volatility levels we are seeing today (~20 on the VIX) are NOTHING like what we experienced in 2008 (VIX at 79 in Oct. 2008). Or even in August-September 2011 during the debt ceiling crisis (~43 on the VIX). Since late 2011, the VIX has hovered mostly in the mid-teens.
A largely unnoticed anniversary might help keep all this volatility in perspective. A recent day in October marked six years to the day after the Dow Jones Industrial Average posted its biggest one-day point gain (11.1%) in its history. But during the eight days leading up to this historic rally, the market cratered 2,400 points, which represented the worst one-week performance in its 112-year history.
Due to our strict adherence to our clients’ target asset allocations, we have been net sellers of stocks during the significant run-up in prices of the past five years. Stocks don’t appear particularly overvalued to us, but they certainly aren’t anywhere near as cheap as they were in March 2009 or October 2011.
It’s impossible to say whether this is the beginning of the correction that has been so popularly forecast in the past year or two. As you know, we are not in the business of predicting the timing or magnitude of market swings. We can certainly comment on them, but doing so isn’t going to have any real impact on how we manage portfolios.
When markets move downward significantly, we will rebalance and we will harvest losses for tax purposes within taxable accounts. Asset allocation, diversification, and tax efficiency are the areas over which we can exert control; market movements are most certainly not.