What Market Volatility Means for You

by Mitchell J. Smilowitz, CPA

In early February, volatility returned to the investment markets. To put this volatility into perspective, I asked myself five questions.

1. What are my financial objectives?

As the CEO and a participant in the JRB Retirement Plan, my goal is to provide financial security for our participants – and the funds my family and I need to retire with confidence. That makes me a long-term investor. Whether you are saving for retirement or already retired, you are a long-term investor, too.

Investing for the long-term, I reminded myself, requires looking beyond today’s market fluctuations and focusing on the fundamentals underlying the economy. This leads to the second question.

2. What are the long-term prospects for the U.S. and global economies?

Recent data indicate that the economy is strong.

• The Labor Department reported that the United States added a robust 200,000 jobs in January. 
• Most economists predict continued strong growth in the U.S. economy in 2018. 
• Real-time indicators that often warn of an economic slump remain positive. 
• The Conference Board’s Leading Economic Index points “to a continuation of strong economic growth in the first half of 2018.” 
• The U.S. unemployment rate stood at a 17-year low in January, 4.1%. 
• The Institute for Supply Management reported that economic activity in the manufacturing sector increased in January and the overall economy grew for the 105th consecutive month. Economic activity in the non-manufacturing sector grew in January for the 96th consecutive month. 
• Bond market prices suggest that continued growth — without excessive inflation — is the most likely future. 
• Other market indicators that might signal global economic troubles, like the price of oil, point to a steady-as-she-goes global economy. 

3. What IS Causing the Volatility in Equity Markets?

Several factors could be influencing investors.

• Investors may believe that the strong jobs and income data will lead to larger wage increases and more pronounced inflation. 
• The transfer of Federal Reserve leadership from Janet Yellen to Jerome Powell may have created concern about changes in the Fed policy regarding interest rates.  
• After an unprecedented rise in value, investors may believe that the markets are pulling back and resetting company valuations to more “reasonable” levels. 
• Large financial institutions that rely on computer algorithms which automatically execute stock trades may create a snowball effect that intensifies fluctuations in stock markets.

4. How Do I Put This Volatility into Perspective?

Volatility in markets is normal.  It allows investors to consolidate gains and prevents bubbles from occurring.  The bull market that began in 2009 saw equity markets make steady gains.  Capping this solid growth, 2017 was one of only two years in the past 38 that experienced market corrections of less than 5% (1995 was the other). That can make the decline that began in February feel different or unfamiliar.  

5. What Should I Be Doing?

• Maintain a long-term perspective. Since its inception in 1928, the S&P 500 has averaged a 7% return adjusted for inflation. 
• Focus on the fundamentals. As we can see, the long-term fundamentals of the economy remain strong.  
• Consider whether your current asset allocation correctly balances your comfort with volatility and your financial goals. Your investment choices should follow your financial goals not your concern about how the stock market will perform tomorrow.
• Avoid selling when the market is down.  Selling after the market declines locks in your losses.  Maintaining your holdings for the long-term can allow you to regain value as share prices recover.
• Avoid market timing. It doesn’t work for us mere mortals. Market timing requires that you have to be right twice – you need to pull your money out of the market before it goes down and you need to reinvest it before the market goes up.  The cost of missing either of those dates is significant.

Have questions about the volatility of the markets and what it means for your financial plan? Considering changing your asset allocation or rebalancing your portfolio? Contact the JRB at 888-JRB-FREE (572-3733) or staff@jrbcj.org.