Market Volatility is Normal!
The Dow Jones set a new high this year and since then it has been in a downward slide hitting Bear Market territory. As always, our job is to provide perspective when needed and more importantly, to follow our investment planning process.
Perspective first, many of you have seen the chart above as we refer to it often in our meetings and discussions. The bars are the returns for each year, for example the first bar represents the return in 1980 of 26%. The red dot below that bar is an intra year move of -17%. What the chart is depicting, using the year of 1980 as our example, is that the markets return at year end was up 26%, however during that year the market had a -17% swing. So it ended the year up 26%, but sometime during that year it was down 17%. And then you can see every year thereafter. We think this is important because it provides perspective that in any year we will have market swings, some of them dramatic, yet as you can see the market is up the majority of the time year after year.
We also believe the market is primarily driven by 3 factors: Fundamentals, Emotions and Momentum. These primary factors are what is driving the markets today. The “momentum” is primarily driven by hedge fund and frequency trading firms. The “emotions” primarily come from individual investors/401k holders etc… And the “fundamentals” are what long term investors use to think through whether they see real value in the markets.
One could wonder why the market trade somedays with such massive swings. That is primarily due to the “momentum” traders, investors, some companies being over extended and having to shift or sell their investments. When you have the barrage of news flow over the Coronavirus which is fueling our emotions, long term investors are sorting through all of this to see if the “fundamentals” are truly going to be affected by all of this, and determine what the impact maybe to the value of the companies in the market.
What is the real value of the market?
That is the problem, that is what every investor is trying to figure out right now and that is what is causing so much volatility. First let’s take our starting point, by many investor standards including our own, the market was at an all-time high and valuations were a bit extended. Then pile in the constant virus news flow, along with the political environment that preceding the virus pandemic, that was massive dose to “fuel to the “emotional” fire” volatility has ensued.
So now investors find themselves in Bear Market territory after setting a new high. The issue is how does one evaluate the “unknown?” What happens to the market if the virus spreads to the US in a more rapid rate? What happens to our markets if the current President is replaced by a Democratic nominee, and what are their policy changes going to do to the markets? What if the current President remains in office? There are a lot of unknowns right now to factor in.
This is what the market is trying to digest in the midst of a momentum shift by traders and heightened emotions by investors. For some perspective, remember the market hit a new high in October 2018, then dropped 20% by December of 2018, only to set a new high by Q1 of 2019. I am not suggesting that we will follow the same path today, I am suggesting that this is just part of being in the markets. We have had a great run with an unusual lack in volatility. 5-7% drops are the norm for the markets, 10% drops happen every year or two and 20% or greater drops, well, as tough as they are to watch, they have been the greatest opportunities to find value in the markets to invest for the long term.
We continue to apply the principles of our investing process, and yes you have all heard them before, they have not changed, because they continue to stand the test of time. Please do not hesitate to send us any questions or give us a call regarding any thoughts or concerns you may have. In the meantime, we will continue to operate our investment process and we will weather the current storm, we always have!
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Private Wealth Services, LLC. Undivided Wealth Management is a member firm of Kestra Private Wealth Services, LLC, an affiliate of Kestra IS. Undivided Wealth Management and Kestra IS are not affiliated.