Wednesday, Nov 07

Market Volatility Is Normal: The Key Is to Not Be Distracted

Recent market volatility has been driving the headlines with the October pullback exceeding 7 percent and inciting some anxiety among individual investors. While this is a natural reaction, it’s vital for investors to remember there’s no need to panic. Markets will fluctuate, and it’s not unusual for 5 to 10 percent pullbacks to occur.

By Joe Mallen

Recent market volatility has been driving the headlines with the October pullback on the S&P 500 Total Return Index exceeding 9% and inciting some anxiety among individual investors. While this is a natural reaction, it’s vital for investors to remember there’s no need to panic. Markets will fluctuate, and it’s not unusual for 5% or even 10% pullbacks to occur.

The problem is every time a significant drop occurs, the pullbacks are exacerbated as financial pundits try to predict the next recession and high-frequency traders jump on trends. But the data just doesn’t support that a recession is near.

We studied the S&P 500 Total Return Index going back to 1950 and the results were illuminating. During that time, a 9-10% decline has occurred nine times. Remarkably, it only took an average of 35 trading days for the market to recover the lost ground. In one case, a full recovery happened within only 16 trading days.

We recommend advisors stay the course on their investment strategy unless the data supports a long-term equity market drawdown. What we’re seeing now is just a pullback whose timing was not surprising. Mid-term election season tends to cause volatility in the market and investors are closely watching the Federal Reserve’s interest rate decisions, which certainly could be a factor in this case.

But much of the same trepidation existed a month before, so why did the pullback happen when it did? The bottom line is although you can try to explain away a decline, sometimes it’s just natural market volatility and there’s no deeper explanation.

Most of the relevant economic data points are still positive and support the notion of a strong long-term economic state. Nothing substantial indicates we’ll reach a negative GDP point anytime in the next few years. In other words, this isn’t another 2008.

We do expect market volatility to remain at a heightened level through the end of the year. Despite significant support for markets, including strong earnings growth, a lot of headline news is distracting people from that underlying strength. By the beginning of next year, we think people will start returning to a normal view of the market and more fundamental factors will drive its performance.

There are many catalysts for continued growth and few for a sustained drawdown. That doesn’t mean the market won’t pull back further or experience more sideways volatility in the near-term. We just don’t see anything that supports a recession between now and at least the end of 2019.

Times like this provide the opportunity to emphasize our core philosophies. Volatility happens and we oppose knee-jerk reactions to it. Markets ultimately follow long-term cycles. The pullback we’re experiencing now is natural and not an indication we’ve entered a recessionary environment.

We advocate removing the emotion from investing so it doesn’t detract from the long-term goals of an investment portfolio. At Helios Quantitative, our mission is to be data-driven and make the highest-probability bet at all times.

Team Helios

Team Helios

Helios partners with Financial Advisors to help them grow their business, save time, and add scale to their services through enhanced asset management capabilities. Helios was founded in 2016 in Granite Bay, California.

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