Global stock markets continued to swing wildly last week as shifts in sentiment seemed to push the markets sharply higher and lower without much rationale. A large rally on the day following Christmas was enough to create a positive week for most stock investors. Holiday spending was strong as Mastercard reported sales rose 5.1% during the holiday season. [i]
For the week, the S&P soared 2.9%. Global stocks rallied, with the MSCI ACWI rising 1.8%. Despite the positive performance in stocks, bonds inched higher as the Bloomberg BarCap Aggregate Bond Index climbed 0.2%.
Key Points for the Week
- Stock market volatility is back.
- The S&P 500 rebounded from losses the previous week.
- Risk remains elevated, and we expect significant volatility in the near future.
The big swings in the market are testing some clients’ patience and making others downright uncomfortable.
Last week’s market moves provided a wild ride for investors and a number of single-day records for the Dow Jones Industrial Average:
- On Monday, investors experienced the worst Christmas Eve on record.
- On Wednesday, the Dow set a record for the largest single-day point gain.
- On Thursday, the Dow moved from 600 points down to 250 points up; it was the largest single-day rally in the index’s history.[ii]
The only day that didn’t produce some kind of record in the first four days of the week was Christmas, when the markets were closed. Other measures also noted increased volatility. The accompanying chart shows the S&P 500 has marked 10 moves of 1% this month, which is well above average.
Source: Morningstar Direct and Carson Group (Information was pulled from Morningstar Direct on December 30, 2018)
Investors need to be prepared to weather additional volatility because once markets become volatile, history shows it can take a while for them to calm down. On December 4, the S&P 500 dropped 3.2%. When markets fall at least this much in a given day, the next 30 days are nearly twice as volatile as the long-term average, based on data tracked since 1996. In general, the deeper the decline, the greater the short-term volatility.
In times like these, sticking to your plan is a crucial first step. The plan your advisor put together for you takes into account markets like this one. Before seriously contemplating any major changes, keep in mind the following:
- Investors usually mistime their moves out of the market and invariably wait too long to get back in. The result is often short-term calm and lower long-term returns.
- The optimal amount of investment discomfort is not zero. In volleyball, the optimal number of points lost on service errors isn’t zero. If you have no errors, it means you should serve a little harder. In investing, if you aren’t uncomfortable once in a while, you might have been able to take a little more risk.
- The accompanying chart also reminds us markets have been volatile in the past. The 10 moves of 1% in December are well above average, but we saw more in 2015 and nearly as many in 2011.
- If you feel a need to reduce risk, make sure your investment strategies haven’t already done that for you. Many strategies have an option to reduce risk in down markets. Your portfolio may already be less sensitive to the downturn.
Most importantly, before doing anything, talk to your advisor. He or she knows your situation far better than a nervous neighbor, a day-trading relative, or a television commentator.
Scottish singer Judy Brown is being called an evil genius for an elaborate prank she pulled on her dad for Christmas. Judy decided to dip Brussels sprouts in chocolate and wrap them in Ferrero Rocher wrappers. She posted pictures of the prank on Twitter and quickly gained popularity.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.