After a rough 2022, the markets took off like a rocket in 2023 and now volatility has picked-up again, with corrections across major indices. What’s driving this market volatility? The war in Ukraine is causing surging commodity prices and 40-year-high inflation has prompted the Fed to tighten monetary policy. These dynamics are creating uncertainty about future growth. It is important to note that the U.S. consumer has been resilient, the labor market is still strong but weakening and profit growth is shrinking.
Volatility is normal. Booming consumer spending, robust profits, and ample fiscal and monetary accommodations drove a 27% gain in the S&P 500 in 2021 with only a 5% drawdown in that year. Yet the S&P 500 falls -14% on average each year, so 2021 was far from normal while last year and this year are in-line with historical drawdowns. Annual returns have been positive in 32 of the last 42 years, underscoring the need for patience.
It’s about time in the markets, not trying to time the markets. Being invested in the equity market for any one calendar year since 1950 could have yielded a 47% return or a -39% return. However, over time, the range of outcomes is compressed significantly and overwhelmingly skews positive, particularly if diversified with bond exposure.
Investors are often tempted to time the markets and get out when they get choppy. If an investor were to miss the 10 best days in the market, they would have cut their return from 9.5% to 5.3% annualized over the last 20 years. Stay invested when you feel the worst. Sentiment is not a great guide for investor behavior.
Through multiple wars, recessions, pandemics, and crises, the S&P 500 has never failed to regain a prior peak and then surpass it. The best strategy during volatile times is to maintain composure, and stick to your investment and customized financial plan.