The market has seen a prolonged period of volatility over the last several weeks, with more down days than up since September, and a significant decline since November 5th, the last major high we saw on the Dow at 25,989. When have we seen this type of volatility before?
Many market analysts have been reporting this is a likely a correction, a bear market warning signal, or signs of another 2008-style collapse.
To answer that question, the data paints an interesting picture:
I. Top 3 reasons the market volatility is not a cause for concern:
- “VIX is operating in a narrow range”: The volatility index, known as the VIX, shows how volatile stocks are trading. At the time of writing this blog, the VIX was around 21 … the historic average is 20. Not exactly tremors of a market melt-down. Surging VIX data sometimes represents buying opportunities or the market searching for a trend line. In either case, it is not necessarily a call for a bear market. In the summer of 2008, the VIX was averaging a 19 and we were already in a recession. In 2000, the VIX was averaging a 22 before the broad market declines of the dot.com bubble burst.
- “Credit market stress having a greater impact”: Credit market stress and the pricing of debt due to recent rate hikes by the Fed have influenced stocks more than volatile trading. We have never had a policy environment of zero interest rates for 8 years, and then raising them from zero in such a short period of time. There is no historical record to compare it to. Congress changing hands has also had an impact. Congress cannot implement new policy, but they sure can hinder implementation of existing policy. Markets are reading this information – volatility is not the issue – a downward turn in the markets due to increased borrowing costs is one of many.
- “Retail sales setting records”: Cyber Monday was the biggest sales day in US history, topping $7.9 billion … this was on top of the $6.2 billion in sales on Black Friday. The combined weekend numbers were 20% higher than 2017 and support an ongoing narrative on Wall Street – the US consumer is driving, sales, profits, and in turn – markets. The 3.5% third quarter GDP number should be higher by the time 2018 wraps up.
II. Top 3 reasons the market volatility IS a cause for concern:
- “Stock market ‘down days’ have not been this bad since the ‘08/’09 crisis”: Stocks have moved 1% or more 50 days this calendar year – significant volatility not seen since the 2008-09 financial crisis. Five of the top ten all-time single day record losses have occurred this year in 2018, including the top three all-time daily losses ever, and two of the top 20 occurring this past month of November. This data suggests volatility is an understatement.
- “Volatility worse than 2015 Chinese yuan devaluation”: In August of 2016, the VIX spiked to 40.75 and remained in the 23-25 range in the fall and winter. The Chinese began devaluing their currency without public notice and traders were caught off guard. Doom and gloom were all the rage … markets took six months to find their bottom … and then, as we know, the market proceeded to continue its historic rise. And that is the whole point – 2008, 2010 flash crash, Chinese devaluation … we have seen volatility before that has not pushed us into a bear market, we are obviously due for that correction.
- “2018 most volatile year for markets since … 2009”: When have we seen markets this volatile before??? Exactly, 2009, the second calendar year of the financial crisis. As stated above, the VIX before the crisis was moving within its traditional range, so not a predictor of trouble ahead per se. But once the crisis had hit and was in full force and effect, the VIX shot above 80 and remained in a range of 50 for much of 2009. According to MarketWatch, compiling data since 1980, 2018 was the third most volatile over the last 38 years.
Data can be used to make an argument one way or another. There is only one way to not have to worry about market shifts – and that is through having your money in principal protected products in the first place. If you want to have your money protected against market losses and growing at the same time, give us a call. (877) 912-1919