Is recent market volatility grounds for investors to panic? The Dow Jones Industrial Average saw a 666 point decline on Friday February 2, 2018. Although this was one of the largest one day drops in the history of the index, let us be reminded that it was only about a 2.5% decrease to the overall index which has reached above 26,000 in early 2018. The selloff continued Monday, February 5, 2018, where we saw the Dow hit a record intraday decrease of 1,600 points, and the VIX (Volatility Index) increasing up to 76% during the trading session. Are turbulent times on the horizon?
Many market analysts are digging for reasons behind the market's recent plunge. Shortly after celebrating all-time highs, which were reached as little as 6 days ago, the headline risk is now alive and well. Some believe that the selling is derived by expectations for higher rates and that the US Federal Reserve will overreact to looming inflation by increasing key interest rates too aggressively. Is that really what is going on or is there another potential explanation? What the individual investor should possibly be more focused on is that short term gyrations, causing massive moves in very short periods of time (i.e.: like a 2-day period) are almost always fully blamed on electronic trading. It’s important to keep in mind that “robots” do not take into consideration economic productivity, corporate earnings, valuations, or make any fundamental assessments when selling stocks. These “algorithmic trading machines” have no discipline when aggressively selling – the selling is technical, mechanical, and involuntary.
Gregg Warren, of Morningstar Analytics, offered the following report: “When we look at the market as a whole, we see some good, positive signs out there. The tax cuts should boost earnings this year, and should also increase the level of share repurchases. You've got a lot of companies already saying, absent the tax cuts, that they're going to see solid sales and earnings growth this year. These are not normal signs that we would see of impending doom for both the economy and the markets overall. This could just be one of those more healthy corrections along the way." (Morningstar)
"It's very easy to get emotional during periods like this, but it’s important to remember that this has been a two-day phenomenon. I caution all individual investors not to panic because the markets never move in a straight line and, in my opinion, we were long overdue for a market pullback after a long period of steady upside in stocks. Unfortunately, in the investing world that we live in, days like last Friday and today occur and it’s likely that volatility is here to stay – at least for a period of time." (Bryan A Kupchik, CFP®, APMA®)
Disclosure: (The opinions voiced in this material are for general information only and are 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 economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.)