301 North Main,
While we don’t make a habit of sending out intra-month comments on market commentary, we felt because we haven’t seen one-day drops in the market like we saw yesterday (May 17th) since September 2016, we should quickly address our consistent view of the outlook of the market.
Downward volatility (or selling pressure) is measured in the markets by the volatility index called the VIX. Post-2008. Volatility (measured by the VIX) has been extremely low1. The last three weeks has had the lowest volatility since the late 1960s, and so we would expect the market to find a bad reason to make a quick sell off. There is a lot of data that shows that when we are near all-time highs and the market has a dip of more than 1.8%, the next 6 months become very bullish (average up 6% and all data points ended 6 month period positive). We also know that in 2013 when the S&P 500 ended above 30% return for the year, in June we had a day that the S&P 500 dropped 2.5%2. So, drops are consistently present inside of upward moving markets.
We are not scared of this drop, even if it turns into a small correction. Even in 2013, the market had an intra-year decline top-to-bottom of 6%. Besides 1995, since 1980 the market has always had an intra-year decline top-to-bottom of at least 5%. In fact, in 1998 there was a top-to-bottom decline of 19% and the S&P 500 still ended up positive for the year +27%3.
Also, while the political news may have caused the “reason” for the dip in the markets, we still maintain our positive outlook of the markets this year based on earning and valuations alone. We wouldn’t expect policy change to really become effective in the markets until next year, so whatever changes in D.C. would minimally if at all affect our outlook for the rest of this year.
So hang on tight. Volatility is common, and even a positive thing to experience in the markets. Think of it as pinching yourself to make sure you’re not dreaming. You pinch yourself to see if you can still feel pain, which affirms that you are in fact awake and alive. When we see markets going straight up, it’s good to pinch ourselves with down days like May 17th to be sure the market’s still know what it means to be volatile.
If you have any questions, please do not hesitate to contact us.
1Morningstar Office™ Data
2LPL Research Morning Call, March 18th, 2017
3JPMorgan Guide to the Markets, 2Q 2017, page 13.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.