Volatility Expectations

In January we saw a return of the extreme market volatility that we saw in the late summer centered on global growth concerns and particularly at what pace China’s growth is slowing down. Weak demand for oil is also factoring into investors concerns. The market declined precipitously and frequently saw daily market moves of more than 1%. For the month the S&P 500 fell 4.96%, one of the 10 worst January returns for the index since 1926.

The recent past has certainly felt more volatile. Have recent years actually been more volatile than what we’ve seen in the past? Our partners at Dimensional Fund Advisors looked at performance and volatility (as measured by standard deviation) to see how recent volatility compares to historical levels:

Stock Volatility over decades

There have been decades were stock volatility has been lower and periods where it has been higher. The same can be said of stock returns. Thus, what we’ve seen over the last several years is right in line historical levels and it can be reasonably expected that similar levels of volatility will occur in the future.

Another question the large declines in January raises is – Do large declines to begin the year provide any expectations on how markets will perform over the rest of the year? This was examined as well and the chart and comments below reveal the findings:

January Vs rest of year

Exhibit 1 shows the returns of the S&P 500 Index for the month of January compared with the subsequent 11-month return (i.e., February through December). We find that a negative January was followed by a subsequent 11-month return that was positive 59% of the time, with an average return of 7%, indicating a negative January does not predict poor market returns for the rest of the year. One additional note: if we look at the five lowest January returns, excluding January 2016, the average return for the remainder of the year was 13.8% and none of these years finished in the lowest 20 years of annual returns for the S&P 500 Index.

Thus a negative January does not predict negative returns for the rest of the year. In the past it has actually been more likely to post positive returns. Where the market heads for the rest of the year is anyone’s guess, but an investor certainly should not expect the market to continue to decline after a poor start to the year.

These charts reinforce the importance of remaining disciplined with your investments and not letting emotions dominate decisions. If you are able to stay true to your investment strategy and take advantage of volatility when it arises by strategically rebalancing you are much more likely to be able to reach your financial goals.

 

 

Index Performance                                      Jan.       Trl 1 Yr       

US Stock (Russell 3000)                                  -5.64%       -2.48%
Foreign Stock (FTSE AW ex US)                    -6.84%      -11.04%
Total US Bond Mkt. (BarCap Aggregate)        1.38%        -0.16%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)     1.07%          1.05%
Municipal Bonds (BarCap 1-10yr Muni)         1.08%          2.12%
Cash (ML 3Month T-Bill)                                  0.00%         0.05%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

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