Gaining Perspective on Stock Market Volatility
Mike Earl, CFP®, CPWA®
One of the most important rules of investing is this: tuning in to media sources (be they financial or general) will not help you be a better investor. In fact, it will likely make you a poorer investor.
Does it help you to know how much the Dow, Nasdaq, or S&P 500 moves in a given day? If the Dow is down 200 points today, will that alter your investment strategy? Will it alter your mood?
Furthermore, point movements on the Dow are misleading. As I write this piece, the Dow Jones Industrial Average (which consists of just 30 stocks out of more than 3,500 total publicly-traded stocks in the US) trades at about 24,750 points. Is a 100-point move a big deal? How about 200 points? Let’s do some math on that:
Down 100 points = down 0.40% (less than half of one percent)
Down 200 points = down 0.80% (less than one percent)
Down 300 points = down 1.20%
Down 400 points = down 1.60%
Down 500 points = down 2.00%
Down 750 points = down 3.00%
Down 1,000 points = down 4.00%
You might feel crummy when your TV flashes in bright red print, “Dow down 300 points today.” But then you must realize: that’s just 1.2%! Sure, it’s not a good day, but it ain’t all that bad.
The news headlines should simply quote percentage declines or gains, rather than quoting points gained or loss. This would be much less sensational.
Contrast those figures above with where the Dow was about 10 years ago, when the stock market bottomed in March 2009. At that time, the Dow traded down to about 6,550 at its low. A 300-point decline at that time was equivalent to a 4.50% decline. To equal a 4.50% decline today would mean a drop of more than 1,110 points.
Is the Dow a good indicator of the US stock market?
If you do want to track a single barometer of the US stock market, you are better off paying attention to the S&P 500 Index, which (aptly named) measures the cumulative performance of the approximately 500 largest companies in the US.
Has the stock market been more volatile under President Trump?
Being the active Twitter user that he is, President Trump has certainly demonstrated an ability to move global markets. The consensus perception seems to be the stock market is more volatile than normal due to President Trump. A neighbor of mine recently remarked how it had been a “crazy” year in the stock market. That comment puzzled me, as things haven’t seemed crazy to me at all. Even following the recent decline of about 6.5% since the start of May, the S&P 500 Index is still up nearly 10% for the year (as of 6/3/19).
So, the question remains: is the perception of higher volatility under President Trump in accord with reality?
There are many ways of empirically measuring stock market volatility. One simple (and effective) way of doing so is recording the number of days with returns greater than +/- 2%. That is, record the number of days the stock market returns 2% or more in a day – or 2% or less in a day.
President Trump was elected nearly 31 months ago, and he has been in office for 28.5 months. During his time in office, the US stock market has had a total of 23 days with +/- 2% moves in the S&P 500 Index. Interestingly, we had zero such days in 2017, and then 20 such days in 2018. This follows the usual cyclical patterns we see in various aspects of stock market history.
Since 1950, the average number of days per year with single-day moves of +/- 2% or more is 11. Under President Trump, we have averaged about 9.7 days per year.
Therefore, the data thus far shows the stock market has been slightly less volatile (overall) under President Trump. However, volatility ebbs and flows, paying no mind to whom is in office. One of the best things to do is remember all the past crises our country has come through (The Great Depression; The Great War; World War 2; The Vietnam War; The Cold War; The Tech Crash and 9/11; The Great Recession). When you think about all of those tremendously challenging times, the recent bit of Trade War with China talk pales in comparison.
What does this mean to you, our client?
You are investing for the long road. Short-term market fluctuations should not affect your investment strategy, as you are planning for many decades — not for the next year or two.
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material, and is not a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.