It has been a rollercoaster few weeks on the stock market.
A dramatic plunge was followed by a strong rebound, resulting in one of the best weeks for the S&P 500 this year.
This turmoil has left many of you wondering: “are markets more volatile at the moment?”
Market fluctuations are typical. In any given year, markets have a standard deviation of 15 to 20%.
That means, on average, whilst they usually end the year positive, they move up and down by around 15% during that period.
A bear market, which is a drop of more than 20%, happens on average every five to seven years.
So whilst we expect some fluctuations, does it feel like things are more chaotic than usual?
I have some thoughts.
Over the past few decades, there is evidence to suggest that the stock market is experiencing larger and more frequent daily swings.
For example, the number of days where the S&P 500 moves by more than 1% in either direction has increased compared to previous decades. In the 1950s and 1960s, such days were relatively rare.
This could be the consequence of various factors.
The rise of high-frequency trading (HFT), where computer algorithms make rapid trades based on market data, has contributed to this increased volatility. These systems can exacerbate price swings, particularly during periods of low liquidity or high uncertainty.
Furthermore, markets have become more interconnected globally. Events in one part of the world can quickly ripple through to others, causing increased volatility.
For instance, geopolitical tensions, trade wars, or economic policy changes in major economies can lead to rapid market adjustments.
There is evidence to suggest that modern markets are more volatile than they have been in previous decades.
But, this may be attributed to how we measure and compare market data across decades.
The 2010s are called the “The Lost Decade” for investors, with virtually no gains between 2000 and 2010. The primary reason?
The systemic crash happened at the end of the decade. Had it happened in the middle, our perception might be different. Therefore, you could argue that the way we measure market performance is flawed.
But what about the most important aspect of markets⸺returns⸺are they lower?
If you remove the 2008 Financial Crisis from the figures, there is no evidence to suggest that returns are slowing.
Most significant of all, equities still hold the crown as the best asset to beat inflation.
Other assets have their merits and fulfil important roles too, but to this day, if it's growth you're after, equities outperform all others.
While market volatility may appear to be on the rise, it's equally important to note the resilience of the market and the speed at which recoveries can occur. It's a two-sided coin.
The COVID-19 pandemic triggered one of the fastest and most severe market crashes in history. From February 19, 2020, to March 23, 2020, the S&P 500 plummeted by approximately 34% in just 33 days.
This period saw widespread panic as the global scale and economic impact of the pandemic became apparent, leading to a rapid sell-off across all sectors.
Following the March 23 low, the S&P 500 began an extraordinary recovery and in just five months, it had regained its pre-pandemic levels by August 2020. By the end of that year, the index had gained more than 16%, a remarkable turnaround considering the depths of the crash.
To conclude, despite evidence that market movements (both positive and negative) are happening more frequently, significant declines (such as drops of more than 20%) still align with long-term historical averages.
Whilst the data shows increased volatility, long-term market returns, which underpin all our financial plans, have not diminished. Most importantly, they remain higher than inflation and all other asset classes.
So when concerns about volatility arise, I’ll remind you that it is crucial to remain focused on long-term goals and resist reacting to short-term market swings.
We have the experience to support you in navigating turbulent times, ensuring that your financial strategies remain aligned with your long-term objectives.
Our approach is to work with you to build a financial plan that can withstand volatility and ensure your ongoing success.
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