Volatility is Back … and It is Here to Stay

By Jason Staley, CFA, CAIA®
Investment Relationship Manager/Director of Research and Due Diligence
Schneider Downs Wealth Management Advisors, LP

One could be forgiven if they are feeling a case of whiplash as they look at the current state of equity markets and, in particular, the S&P 500. On the surface, the S&P is down a modest -2.4% (inclusive of dividends reinvested), which would make some sense given that in 2019 the S&P 500 returned +31.5%. To the lay observer, equity markets were taking a breather following a scorching 2019. However, due to the COVID-19 shutdowns across the country, most people were not lay observers. Instead, as a result of unique circumstances caused by the nationwide shutdown, many more people have become keen observers of equity market movements (here is where the whiplash part comes in). Starting at the market peak of February 19th, the market has experienced significantly elevated levels of volatility, with wild price swings to the downside and the upside. The S&P 500 entered a bear market in record time, falling 30% in 22 trading days ; correspondingly, the S&P 500 entered into a new bull market (using the standard definition of +20% from its low point) in a record 12 trading days  because it is 2020, a year in which anything can, and likely will, happen.

One item that I think might not be appreciated fully by the newly minted “keen observers” of the market is that the best days in the market are often clustered around the worst days. In the table below, I have highlighted some of these days, and why it is important to rely on the foundational principles of identifying risk tolerance, time horizon, and liquidity needs to get you through volatile days (weeks and months) in the market.

Date S&P 500 Daily Returns
2/27/2020 -4.40%
3/2/2020 +4.61%
3/3/2020 -2.81%
3/4/2020 +4.23%
Date S&P 500 Daily Returns
3/13/2020 +9.32%
3/16/2020 -11.98%
3/17/2020 +6.00%
3/18/2020 -5.18%
Date S&P 500 Daily Returns
3/20/2020 -4.32%
3/23/2020 -2.93%
3/24/2020 +9.39%
3/25/2020 +1.15%
3/26/2020 +6.25%
3/27/2020 -3.37%
3/30/2020 +3.37%

The table above illustrates 15 trading days, with every day but one occurring in the month of March. Predicting markets as volatile as the above is a fool’s errand, which naturally leads to the question in many investors’ minds: how do we weather this type of storm? Our answer: focus on the basics and ignore the noise (daily volatility) as much as possible. Very few, if any, can exactly predict when a crisis will occur, so it the planning that investors and advisors do before a crisis hits that helps them navigate to calmer waters. Understanding your risk tolerance, the amount of drawdown in your portfolio you are willing to accept without selling, is of vital importance. Going through the events of March, investors’ risk tolerances were tested and should be updated. Were you able to tolerate the wild swings of March without altering your investment outlook? Re-evaluating your risk tolerance goes hand in hand with your time horizon and liquidity needs. If your time horizon is greater than ten years, the short term volatility we experienced in March, while unpleasant, shouldn’t materially affect your investment outlook. It especially shouldn’t alter your outlook if you have had an open dialogue with your advisor about your immediate liquidity needs; these immediate, or short-term, liquidity needs should be kept in cash or cash equivalents. If an investor’s cash reserves accurately reflect their needs, additional funds would not need to be raised during volatile time periods such as March (where raising money could “lock in” permanent losses). 

Ultimately, we cannot control for volatile time periods like we experienced in March. The best way to successfully traverse the explosive bouts of market volatility is with a coherent and holistic investment and financial planning strategy. Referring to that plan, holding onto it even on days where the market drops 12%, as it did on March 16th, is what gives investors the most likely chance of achieving their goals. Otherwise, rash and sometimes unwise decisions can be made, as documented in a recent Wall Street Journal article where 31% of investors between the ages of 65-68 sold all of their stocks between February and May.  Now that we have navigated back to calmer waters, the prudent course of action is to re-assess (with your advisor) whether your risk tolerance, time horizon, or liquidity needs have changed… Because market volatility is back, and it is here to stay in a post COVID-19 world. 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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