While market volatility can be frightening, it can also be a very useful tool
On February 23rd, the S&P 500 entered its first correction in a long time (a correction is defined as a market decline of at least 10% from recent highs). Technically, the S&P 500 has not seen a correction in almost two years, but that changed when Russia invaded Ukraine. That evening, after stock markets in the U.S. closed, S&P futures pointed to a pretty significant decline the following day, suggesting that markets might drop by 3-4%. And sure enough, U.S. markets opened and proceeded to drop quickly.
Then a curious thing happened: markets rose throughout the day. And when the final bell rung on February 24th, the S&P 500 was up 1.5% and NASDAQ had jumped 3.3%. That day should be a good reminder to all investors that while market volatility can be frightening, it can also be useful.
Here’s why: gyrating stocks are a good reminder to look at your portfolio with a critical eye. The key is to curb your emotions and not panic.
Remember, the last market correction we saw was on February 27, 2020, when fears of the COVID pandemic were just starting to build. About a month later, stock markets bottomed out (March 23rd). Since that time, we have enjoyed a nice advance in equity prices, up until earlier this year (January 3rd).
Forget What a Down Market Looks Like?
With the type of market action seen from March 23, 2020 through January 3, 2022, many investors relaxed and forgot what a down market looks like. This might have changed starting on February 24th, when the Chicago Board Options Exchange Market Volatility Index, often called the “Fear Index” or just the VIX, shot up to over 36 from the mid-20s the day before.
This massive amount of volatility can scare some people. Such huge movements can make you overthink your process and question your investments.
That isn’t a bad thing, though: Sometimes, it’s good to get a little shake to wake you up and re-examine what’s in your portfolio. You should constantly evaluate the risk level in your portfolio and make sure your holdings are positioned appropriately.
What’s important is to remember that single-day events and even multi-day events of market weakness and volatility upticks are normal, healthy and, to some extent, expected. The streetlights still come on at dusk, the coffee still brews in the morning, and the dry cleaning still awaits pickup. The point here is that life goes on, no matter what the market does.
S&P 500 Post Corrections
If we go back almost 100 years, history suggests that markets tend to bounce back pretty quickly after entering correction territory. Take a look at the data below compiled by Dow Jones Market Data:
S&P 500 | Three Months | Six Months | 1-Year |
Average | 3.7% | 4.7% | 9.3% |
Median | 2.3% | 4.2% | 13.3% |
% Positive | 57.6% | 61.6% | 65.7% |
But as compelling as the above numbers might be, that’s not the point.
Look at the Big Picture
Days like February 24th make this point with a lot of fanfare. We all remember the waterfall-like stock slide during the 2008 financial crisis. Many investors lost their life savings. The pain became too much to handle. The Dow Jones seemed headed for zero. But that didn’t happen.
As investors, we must get up, dust ourselves off, and realize that, while a light might not always be visible at the end of the tunnel, that doesn’t mean it’s not there.
So while we will reset the clock on the number of days since we’ve had a market correction of 10% or more, we should check ourselves and make sure we aren’t too complacent. When we become overly content, things change and the market hiccups.
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