Market Commentary May 9, 2018

    A recent increase in market volatility has led to understandable anxiety for investors. But it's important to step back during these periods of turbulence to put them in perspective. Your perception about the level of recent volatility depends greatly on your frame of reference—whether you're viewing from the valley of below-average volatility over the past few years or from the peaks of truly unprecedented volatility of late 2008.

    Market volatility has risen but is far from previous highs

    To put the recent volatility into context, we compared the daily price movement of U.S. stocks in 2018 with two previous periods of elevated volatility: August – September 2015, when the U.S. equity market saw a correction in response to fears about China and global economic growth; and September – October 2008, the height of the financial crisis.

    As Figure 1 illustrates, recent volatility has reached similar levels as in 2015, but it remains far below the levels reached in 2008. While the S&P 500® Index saw a single-day decline of 4.1% in February 2018, the index saw swings of as much as +/- 10% on single days in 2008.

    Chart showing recent volatility has not reached the levels or frequency of October 2008 and August 2015.

    Stocks have seen fewer large daily moves than in previous periods

    Figure 2 further illustrates that the large moves for U.S. stocks have also been less frequent than in previous periods shown. The S&P 500 Index saw a daily price change of at least 2% on 6 trading days in February – March 2018 in comparison to 8 trading days in August – September 2015, and a whopping 24 days in September – October 2008.

    Chart shows that large moves for U.S. stocks have also been less frequent when compared to October 2008 and August 2015

    Current market volatility has risen back to its long-term average

    As Figure 3 illustrates, the rolling 12-month volatility of the S&P 500 Index rose to 13.4% in March 2018 from historical lows in 2017. While volatility has returned to its average level of the past 20 years, it remains a bit below levels reached in 2015 – 2016 and well below the 30% level reached during the financial crisis.

    Chart shows the rolling 12-month volatility of the S&P 500 Index rose to 10.8% in August 2015, well below its 20-year average of 14.1% and the 30% level reached during the financial crisis

    Having a strategic plan and sticking to it is key to investment success

    While market volatility has risen in 2018 following one of their least volatile years on record in 2017, it’s important to remember that periods of market turbulence inevitably occur from time to time. This is why having a strategic asset allocation plan (and sticking to it) is one of the most important elements of long-term investment success.

    If the recent volatility has resulted in sleepless nights or the temptation to sell your investments, perhaps you've assumed that you had a higher risk tolerance than truly matches your risk profile. These periods can be a good time to re-examine your goals, time horizon, and risk profile to make sure that you're invested in a portfolio that can help you work towards your longer-term goals, without panicking during periods of short-term market turbulence.

    By David Koenig, CFA, FRM, Chief Investment Strategist, Charles Schwab & Co.

    The S&P 500® Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested directly.

    Investing involves risk including possible loss of principal.


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