PHONE: 414-223-1099 TOLL-FREE: 1-800-236-1096

Handling a record shift in stock volatility

Although stock market volatility merely returned to typical ranges in 2018, the abrupt resurgence was unprecedented – and for many investors,  jarring. Dave Sandstrom offers some perspective.

Joel Dresang: Dave, investors have faced an unprecedented shift in stock market volatility in 2018. It was an extraordinary lull throughout 2017. And now, all of a sudden, we’ve got prices going up and down and up and down. How bad is it?

Dave Sandstrom: Joel, the volatility index, or the VIX as it’s commonly called, has certainly spiked early this year. But as you mention, we’re coming off of this extremely low volatility time frame in 2017. And now in 2018, we’ve actually just kind of returned to a more normal volatility. But I think what it is is it’s that spike and the abrupt nature in which it changed that has really unnerved investors.

Joel: So why do you think all of a sudden we’re having this volatility again?

Dave: We had some things that were some concerns in 2017. We had a lot of natural disasters with hurricanes and wildfires. We also had some news and some threats from North Korea. But nothing real measurable as it relates to the economy. As we get into 2018, we have fears of inflation being talked about. We have fears of trade wars. Those are a little bit more measurable, and I think that that has spooked investors a little bit.

Joel: So the stock market has been rising since 2009. What effect does that long bull market play on skittishness?

Dave: Well, I think it plays a big role, Joel. I think after you’ve experienced this ongoing bull market for so long, it’s human nature to expect something bad to happen. But remember, bull markets don’t die of old age. They die for a reason. Typically, that would be at the end of the business cycle. That’s when inflation appears and we enter the next recession.

I think that there’s still some reasons to be optimistic, however, as corporate earnings forecasts remain strong and interest rates are still at historically low levels.

Joel: The Federal Reserve Board has been raising interest rates since the end of 2015. What about the fear of rising interest rates playing into that volatility?

Dave: Rising rates are a legitimate concern, Joel. But I think it’s important to remember that we’re still in the normalization process, so the Fed is still just trying to get back to what they call the normal rate. I think once we get above that and we’re aggressively combating inflation, that becomes a very difficult time for stocks.

Looking back historically at the 10-year Treasury, 5% is kind of the tipping point. We’ve seen rising rate environments where the 10-year is yielding below 5% typically corresponds to rising stock prices. Once we get north of that 5% at the 10-year Treasury yield, that becomes a very difficult time for stocks. So we still have a little bit of room to play with there.

Joel: So what do you want investors to know about this return to volatility?

Dave: It’s important not to get caught up in the daily swings, Joel. Remember that volatility does cut both ways. It can mean rising stock prices as well as declining stock prices. And it’s important to remember that our stocks are for the long run, not money that we need tomorrow, or next month, or even next year. So we want to just avoid worrying about that daily swing. And that’ll help keep us out of trouble.

Dave Sandstrom is vice president and an advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Pete May

Learn more
Volatility is back: 5 things to know, a Money Talk Video with Dave Sandstrom
Volatility: What investors should know, a Money Talk Video with Marc Amateis
The ups and downs of volatility, a Money Talk Video with Steve Giles
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
5 things to do when stocks aren’t cheap, a Money Talk Video with Marc Amateis
(initially posted May 17, 2018)

Send us a question for our next podcast.
Not a Landaas & Company client yet? Click here to learn more.
More information and insight from Money Talk
Money Talk Videos
Follow us on Twitter.

Landaas newsletter subscribers return to the newsletter via e-mail.

Text Size:  A  A  reset

No client or potential client should assume that any information presented or made available on or through this website should be construed as personalized financial planning or investment advice. Personalized financial planning and investment advice can be rendered only after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures.
Landaas & Company performs investment advisory services only in those states where it is licensed, or excluded or exempted from state investment advisor licensing requirements. All responses to inquiries made by prospective customers to this internet site will not be made absent compliance with state investment advisor and investment advisor rep licensing requirements, or applicable exemptions or exclusions from licensing.
Please contact the firm for more information.

Powered By: mindspike design
© 2024 Landaas & Company