Is The Market Volatile?
Your fear of the current market action is dependent on your experience. If you don’t have a lot of experience in the market, you may be afraid, but this has been a normal year. I made the prediction late last year that this year would be more volatile than 2017. That was based on my expectation of less gains and a reversion to the mean of volatility. One big lesson which needs to be repeated is if you don’t have experience investing in volatile markets it doesn’t mean you can’t do it successfully.
Furthermore, if you have experience, it doesn’t make you an expert. The perma bears love to discuss how many young or new investors haven’t seen a bear market, but keep in mind that seasoned professionals make bad mistakes and underperform often as well. Also, it is always impressive to make money in the market and to beat it. Don’t let people talk down your returns because they occurred during a bull market. The stock market is on a bull run most of the time.
The chart below shows the increased volatility in 2018 compared to 2017. As you can see, the percentage of days the S&P 500 has been up more than 1% is a bit above average and the percentage of days the S&P 500 has been down more than 1% is average. It’s notable how whenever there is volatility to the downside, there are also large upswings. In bull markets, the market goes down quickly and up slowly. In bear markets, the market crashes even quicker and rallies fast as well. Dip buyers look smart for a short time in bear markets and then get crushed. To answer the question header, the market has been about average in 2018. Due to recent weakness, the returns have been below average.
Financial Conditions
According to the Chicago Fed National Financial Conditions index, the financial conditions are very close to the easiest of this expansion. It’s notable that the conditions bottomed and started getting more stressed before the market topped in January. The conditions bottomed in November 2017 and were stressed slightly more in January. There were so many negative signs in January that it’s difficult to say this one was strong enough to make you sell. The good news is that the stress topped out in March/April and has gotten easier since. This indicator was great last cycle because it soared in the summer of 2007. It might not soar as much in the next recession because it didn’t in the prior two as those weren’t financial crises.
