Living with Stock Market Volatility
In October, we have experienced a dramatic spike in volatility in both the equities and fixed income markets. With this volatility has come a sudden and dramatic sell-off in the equities markets and a rush to safety in the bond markets (the yield on the 10-year US Treasury bond has fallen as low as 2.00%). Today, we saw the CBOE Volatility Index or VIX jump to almost 28.0, the highest level since the fall of 2011. The VIX is a relative measure of the cost of buying options on the S&P 500 Index one month in the future. In general terms, an increase in the VIX often translates into falling stock prices. The long run average of the VIX is 20.0.
Market sell-offs are unpleasant for both investors and their advisors. Often times the sell-offs occur with little warning or reason. A market correction is a period of selling or temporary price declines of at least 10% - the current sell-off may very well reach that level this week. (For more information on market corrections, please read our article found at this link www.academywealthadvisers.com/stock-market-corrections.)
History suggests that market corrections do end. If you have constructed a diversified portfolio, are disciplined in asset allocation and selection and manage risk then there is no reason to panic. I read the following quotes this morning and found both to be insightful and reassuring.
From David P. Kelly, chief global strategist at JP Morgan Funds - "nothing happened last week to justify a sudden surge in volatility. In fact, from a market-moving perspective, it was a very quiet week with no major economic releases and just a handful of US corporate earnings reports. Sometimes volatility just happens. Like now. So it's probably as good a time as any to remind investors that volatility comes with the territory."
From Scott Clemons, chief investment strategist for private banking at Brown Brothers Harriman - "the recent reversal in stock prices is more a reflection of the internal structure of markets rather than a response to external developments (for example ISIS, Ebola, recession in Europe and slow growing China). Likening the stock markets' lengthy upward trajectory to building a large pile of sand, one grain at a time, eventually one grain, indistinguishable from all the other grains, will cause the pile to shift. That's what is happening now."
