Looking beyond stock market volatility

05.08.20

While stocks historically have been volatile, especially in response to major domestic or world events, a review of market data shows that their prices in many cases have returned to less volatile patterns over longer time periods. That can be good news for long-term investors.

One definition of the word volatile states the meaning as “tending to rapid and extreme fluctuations.” With regard to the stock market, volatility typically refers to the size and frequency of price movements. Volatility can be shown using standard deviation, a measure of the variance in the returns of a given security or market index.

In general, higher volatility means a wider range of potential values for a security or index, and the possibility of sharp movements over short time periods — whether up or down. This market turbulence historically has increased during times of major uncertainty triggered by global events or economic disruption, such as the reaction to the coronavirus (COVID-19) pandemic in early 2020.

However, an analysis of market data going back nearly 100 years — before the 1929 stock market crash — shows that periods of broad price movements are not unusual. In fact, volatility is part of the natural order of the markets. Bull and bear markets don’t last forever, and investing opportunities often follow the most uncertain market conditions. While market downturns and long periods of volatility can be discouraging, long-term trends show the stock market has rewarded patient investors.

A BRIEF HISTORY OF MARKET VOLATILITY
Chart Showing A BRIEF HISTORY OF MARKET VOLATILITY
Chart Showing A BRIEF HISTORY OF MARKET VOLATILITY

Source: Chicago Board Options Exchange (CBOE) Volatility Index. Data shows the historical measurement of expected market volatility based on the expected level of price fluctuation in the S&P 500 Index options from 2000–2020. The higher the value, the more the expected volatility.Past performance is not a guarantee of future results.

Cost of missing the market

Some people believe investing is a matter of timing. They say it is best to invest heavily in stocks when the market is going up, then get out when the market starts going down. But there is a problem with that strategy: Even the smartest investment professionals can’t accurately predict the exact timing of such market moves.

The reaction to the COIVD-19 outbreak provides a perfect example of the unpredictability of the markets. Within the span of about 30 days, the U.S. moved from a relatively strong domestic economy with financial market indexes hitting record highs, to a global recession.

MISSING THE MARKET CAN BE COSTLY
Average annual total returns of the S&P 500 Index for the 20-year period ended March 31, 2020. Chart Showing MISSING THE MARKET CAN BE COSTLY

Source: Morningstar Direct. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.Past performance is not a guarantee of future results.

Long-term investment success is more likely to be the result of a consistent approach, based on time in the market — not market timing. For example, selling when markets decline can put investors on the sidelines when stocks change direction. Turnarounds can happen quickly and typically have been strong in their early stages. Missing even a few of the stock market’s best single-day performances could have a significant effect on an investment portfolio.

Value of an investment plan

History shows that it is rare for the stock market to have two bad years in a row and even more uncommon to record three bad years in a row. When the market has recovered from downturns, it historically has done so with powerful rallies. In addition, bull markets historically have lasted an average of three times longer than bear markets.

50 YEARS OF BULLS AND BEARS: A MARKET REVIEW
Chart Showing A BRIEF HISTORY OF MARKET VOLATILITY
Chart Showing A BRIEF HISTORY OF MARKET VOLATILITY

Source: Morningstar Direct. Results are based on an initial $1,000 investment in the S&P 500 Index Jan. 1, 1970, to March 31, 2020. Bull markets are noted in green, bear markets in black. Results assume reinvestment of dividends. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.Past performance is not a guarantee of future results.

Even in the worst 20-year period the stock market has ever experienced — 1928 to 1948 — the S&P 500 Index posted an average annual gain of 0.55%. While that is a modest amount, remember that those two decades included the Crash of 1929 and the Great Depression of the 1930s, when unemployment soared to 25%, U.S. gross domestic product plunged by more than 30% and land values plummeted more than 50%. Despite the economic challenges of those difficult years, a patient and committed investor could have had a positive return on money invested in the stock market.

Overall, history shows that patient investors who remain focused on the long term may withstand turbulent periods and take advantage of the opportunities that global change can bring.

S&P 500 INDEX: FROM BEAR MARKETS TO RECORD HIGHS
Trough Date New peak date Months to new record high

05/26/70

01/11/73

39.8

10/03/74

11/28/80

91.5

08/12/82

8/25/87

23.5

12/04/87

3/24/00

23.4

10/09/02

10/9/07

87.4

03/09/09

2/19/20

66.6

03/23/20

Source: Standard & Poor’s Corporation, Haver Analytics, Ivy Investments. Number of months based on 30-daysper- month. Past performance is not a guarantee of future results.

Look beyond current markets

Increases in stock market volatility have been the norm in periods of uncertainty or as a result of major events for nearly 100 years. However, once the outcomes of such “shocks to the system” become clearer or the events are fully resolved, investor confidence tends to rise and the level of market disruption is likely to diminish.

Although periods of volatility may be unnerving for individual investors, an experienced management team can distinguish between daily market noise and real long-term investment risks to position a portfolio accordingly. At Ivy Investments, we look across all asset classes as we review investment opportunities. We believe investors should be compensated over time for accepting volatility in the current market environment, in which we think extreme risk aversion has driven up the price of assets that are perceived to be safe and driven down the price of assets that may participate in future growth.


Past performance is not a guarantee of future results. The opinions expressed in this article are those of Ivy Investment Management Company and are not meant to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

The S&P 500 Index, considered to be one of the best representations of the U.S. stock market, is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Investment return and principal value will fluctuate, and it is possible to lose money by investing. A regular, long-term investment plan does not ensure a profit or protect against loss in declining markets, and involves continuous investing regardless of fluctuating price levels. Investors establishing an investment plan should consider their ability to continue investing through periods of fluctuating market conditions.