Handling a record shift in stock volatility
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.
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)
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