At the halfway point, equity markets are on course to have a rather normal year; although it doesn’t feel that way to investors. Watch financial television or read financial newspapers and it’s been hard to miss the “market volatility” headlines. Indeed, political and economic news has been dramatic enough that Billy Joel would certainly include them if he decided to highlight the second part of his life with a remake of the 1989 hit “We Didn’t Start the Fire” (released on the album Storm Front).
Headlines move markets. They always have, and I suspect they always will. Rational investors must look beyond them to be successful.
A common method to judge market volatility is to measure daily movements greater than one percent—either up or down. Year-to-date, the S&P 500 Index has registered 36 such days (through June 30). Over the past 20 years, the yearly average +/- one percent daily changes are about 70. The chart below details each calendar year.
What stands out from the chart is not this year, but rather 2017. A year in which there were only eight days the index changed by more than one percent. Investors can quickly forget what volatility feels like. I shared this chart with a friend and the following exchange occurred:
- Friend: “Wow – 134 – that would kill me”
- Me: “You think that, but you were invested during that time. Any memories about how you felt?”
- Friend: “Dude… I don’t remember what I just ate for breakfast.”
Having a short memory is great if you’re an NFL quarterback or MLB pitcher. As an investor, it can lead to a plethora of irrational decisions. It’s a key reason why I document my investment decisions.
Looking further back at the data (to 1950), its apparent the past 20 years is representative of market history. However, a few things stand out. First, is that 2017 isn’t unprecedented. In fact, there have been three other years where the S&P 500 registered less than ten one percent moves. The second is that an average is just that. It’s a central number that requires values on each side of it. Historically there have been fewer instances of the market delivering its “average.” The graph below depicts these two statements.
Check out the historical events referenced to in the song. Some of them put today’s headlines in perspective. Events that can (and often do) spook the market happen frequently. The important lesson is that you have a long-term plan that you can follow. One that allows you to look beyond these events.