Just because volatility in the stock market has spiked and is likely to remain elevated, investors shouldn't be heading for the hills in a panic.
While 200-point plunges in the Dow Jones Industrial Average, such as the one on Thursday, will always draw attention, it's important to consider the context and accept a dose of reality.
“We started telling people at the beginning of the year that with the Fed reducing its quantitative easing, the market reins are being handed back to the market, and this is the kind of adjustments we can expect,” said Karyn Cavanaugh, senior market strategist at ING U.S. Investment Management.
Despite the increased level of daily market swings, Ms. Cavanaugh pointed out that stock market volatility, as measured by the S&P 500 Volatility Index (VIX) is still below the average of the past 10 years. In fact, the VIX is currently around 15, which compares with an average of 20 since 2004.
For added perspective, the VIX spiked above 40 during both the height of the euro crisis in 2005 and immediately after the U.S. credit downgrade in August 2011.
“At 15 on the VIX, I wouldn't be too worried,” Ms. Cavanaugh said. “We're still in the midst of an economic expansion, so a stock that was good yesterday is still a good stock today.”
So far this year, the S&P's direction seems to have changed by the month, including a 3.5% decline in January, a 4.8% gain in February and a flat March. All told, the index is essentially flat year-to-date.
But if investors and by extension the markets, are rattled or even a bit confused, that doesn't fit with the data, according to Dick Burridge, co-founder and chief investment officer of RMB Capital, a wealth management firm with $4 billion under advisement.
“We think the economy right now is much stronger than investors are giving it credit for,” he said, citing improving data from the construction industry and auto industry, a pickup in consumer spending and rising consumer confidence.
“We're seeing positive GDP growth in Europe, Japan and the U.S. all at the same time for the first time since before the financial crisis,” he added.
Granted, with the S&P up about 170% since it bottomed during the financial crisis in March 2009, Mr. Burridge admits the market is probably due for a breather. Just not yet.
“We think we're in the third and final phase of the bull market, and we see markets at fair value right now,” he said. “And at fair-value levels, volatility increases because during this phase you will go from being fairly valued to being overvalued.”
But being overvalued is a legitimate part of the cycle and should be embraced.
“Every bull market dating back to the 1970s has peaked at premium valuations,” Mr. Burridge said. “I still think this bull market will last another couple of years, and will gain another 40% from here.”
Even putting the volatility into perspective doesn't always alleviate the anxiety of big market moves, as hedge fund manager Scott Wallace, founder of Shorepath Capital Management, said.
“I think what you have today is selling begetting more selling, and that's happening in the context of reasonably good economic news,” he said. “We're coming up on corporate earnings season, and I think as investors start to see the world isn't in such bad shape, we'll see things start to settle down.”
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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