The last 12 months have proven rather interesting for the equities markets as the Dow and S&P have risen to new highs, despite all of the negative news on the economy. We have heard this rise in prices referred to as “the most hated rally in recent memory,” a rather accurate description. Lately, we have seen many investors and money managers begin to pull money out of the markets, citing uncertain economic data coupled with market volatility as their primary reasons for exiting. While economic growth numbers may still be lagging, the volatility argument holds no weight whatsoever.
One primary indicator that is used to measure volatility is the Chicago Board Options Exchange Market Volatility Index, better known by its ticker, VIX. The VIX is intended to be used to indicate fear in the markets, and does so by measuring a weighted mix of S&P futures contracts. In theory, the higher the VIX, the more negative the outlook on the equities markets. In late 2008, the VIX was trending along 20-25. In late 2008, it spiked up to 60. Currently, the VIX is tracking below 20 and has been for nearly a year. Based solely off of this measure, we should not be seeing negative market movements in the short term.
Another major factor that has caused investors to feel that the markets are incredibly volatile at the moment has to do with nominal market gains/losses as opposed to actual gains/losses. 2008 is still fresh in the minds of many investors, and witnessing the Dow Jones drop several hundred points can be quite startling. However a 150 point drop on a Dow trading at 8,000 (a 1.8% decline) is much more significant than a 150 point drop on a Dow trading at 15,000 (a 1% decline). For many investors, watching the Dow drop 300 points in 2 days can seem a bit disheartening, however we are still seeing 15,000+ values on any given day, and losses have been recovering rather quickly.
We would like to refer our readers to the performance of the Dow Jones from 1980-2000. From 1980-1981, we saw the Dow increase from 759 all the way up to 1024, a 35% increase. That peak then dropped to 776 in June of 1982, a 25% selloff. From this bottom the Dow then increased to 1287 at the end of 1983 only to drop back below 1100 in June of 1984. This trend continued through the early 1990’s, then the market rallied with no substantial corrections until 1999 when we experienced a 20% correction. When all was said and done, from 1980-2000 the Dow Jones increased from 759 all the way up to 11,500, a 1400% increase.
In that time there were certainly investors who became scared or chose not to deal with the volatility and either missed out on a great 20 year bull run, or ended up buying back in at a higher price and hurting their cost basis.
The moral of the story is that those who keep their eyes on the long term goal and refuse to be intimidated by little bumps in the road will certainly prosper. Not even the best investors in the world can predict every single correction, but truly talented investors can determine when a pullback is due to a brief market correction, and when it is due to broader economic circumstances. Our advice to investors who find themselves worried over insignificant 100+ point swings; this may not be the market for you.