Market volatility causes investor anxiety
Investors are experiencing a rough bout with volatility as the VIX index, Wall Street’s fear gauge, hit a level of 25 – the highest level since February 2018. We recognize that occasional daily drawdowns, market volatility, and political noise create confusion for investors. These factors are unlikely to disappear anytime soon, and the market may see more declines, but we support adding equity exposure at today’s levels.
A return to normal market volatility
After months of a nearly straight upward climb in US equity markets, October ushered in significant declines and swings. Stock markets erased most of their gains for this year as they approached correction territory. Year-to-date, the S&P 500 and Dow Jones Industrial Average are roughly flat and the NASDAQ is up about 3%.
The current deterioration in stability is, in our opinion, a return to normal market volatility, and in-line with historical experience. On average the S&P 500 index experiences 3 or 4 -5% declines and 1 -10% decline in any given year. Still, compared to past 21 months – including 2017 which was one of the highest quality years for equity on record – the return to a more standard volatile environment can be difficult for investors.
Source: Bloomberg, Standard and Poor’s, NYLI SAS. As of 12.31.2017. *Denoted as a negative percentage value. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index
Much of economic data suggests that the US and global economy is in good shape. However, the duration of the economic expansion and its recent acceleration leave investors focused on things that might go wrong – not what’s going right.
- Trade: The constant threat and potential implementation of tariffs is certainly a wild card for investors. Tariffs will likely result in higher costs and slightly lower future growth expectations – Caterpillars recent earnings call is a great example. That said, tariffs implemented thus far are small in scale (especially compared to fiscal stimulus), and we believe that the rhetoric and threats of future tariffs is simply a negotiation tactic.
- Fed: The Fed is raising short-term interest rates to normalize monetary policy in response to a very strong economy. Investors expected rates to rise, the concern is where they stop. As interest rates rise, investors wrestle with the future implications for the economy particularly as it relates to credit, housing, and autos. High rates could take out some of the weak links in the economy. As a result, any indication that inflation is accelerating – and thus that the Fed could raise rates more quickly – is prompting an outsized market response.
- Corporate profits: Corporations and analysts are revising down their expectations for future earnings growth. This quarter will likely be the last of the bang-buster growth rates experienced this year. While this dynamic is expected in general, investors have been reacting to specific companies and taking stock of most-impacted industries.
- Midterm elections: There is concern that a reshuffling of congress could change policy trajectory of the US economy. We encourage investors to focus on policy reality rather than politics. Markets have historically advanced following midterm elections; we expect the same to be true this time around, and volatility to subside somewhat after an initial reaction to the results.
Uncertainty in politics, economics, and financial markets are nothing new, but investor memories are often short. Any news can be a potential trigger for concern particularly following periods of lower volatility and synchronized global growth.
What to do about it?
Timing the market is extraordinarily difficult to do, and allowing concerns to keep you out of the market could mean missing the best days of an upturn. Earlier this year, we reminded investors, that markets historically climb a wall of worry. The worries we are seeing today are no different. Markets are returning to their normal volatility. We recommend using the volatility to add quality stocks to your investment portfolio. If you cannot bear to stay invested or are concerned about the volatility investors may want to consider taking the following steps: reassess your risk tolerance and time horizon, consider an alternative strategy, or allocate to an investment product that provides consistent positive returns.
S&P 500 Index
Source: Thomson Reuters DataStream, Standard and Poor’s, Top down Charts, as of 10/25/2018. An investment cannot be made in an index. Past performance is no guarantee of future results.
Using history as a barometer, the seasonal weakness may have been overdue, especially given the geo-political environment, and the election year effects. That said, market corrections are often a good buying opportunity. Moreover, there are several seasonal, positive, surprises potentially in store for markets and the economy as businesses tend to perform well during the holiday seasons; and, as markets often rally into year-end, with November and December being the strongest months of the year, on average, for S&P 500.
Average S&P 500 Price Return by Month (Since 1950)
Source Bloomberg, Standard and Poor’s, NYLI SAS, as of 10/25/2018. An investment cannot be made in an index. Past performance is no guarantee of future results.
The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors.
All investments are subject to market risk, including possible loss of principal. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.
The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The Standard & Poor’s 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large-cap universe.
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New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, New York 10010, provides investment advisory products and services. IndexIQ® is the indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the indexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs, and NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.