Perspectives on Volatility

Please take the time to read this most recent update on current global investment market conditions, focusing on the U.S. stock market.

In the last two weeks, the U.S. stock market has changed from a sideways and calm trajectory to what feels like almost a daily roller coaster including a huge increase in volatility over just the last 9 trading days. Even two weeks into this character change there is still much debate about the wide variety of potential reasons for the changes, and that debate will continue for some time. Our focus is not on the why, which should become more clear over time, but rather on analyzing what is actually happening and what, if any, portfolio allocations should be made to adjust for the dangers and opportunities that are presenting themselves.

This update is intended to provide some perspective on the current action and offer context on how it may or may not play out going forward.

The first graph below shows calendar year returns (dark blue bars) and selloffs (light blue bars) for the S&P 500 Index going back to 1980. On the far right it states that the average annual return over this period is +10.1%, and the average annual selloff is - 15.4%. In 2015 so far, the top to bottom selloff has been -12.5%, so at this point it still falls within the average range, even though it feels larger than normal. Also note that the prior 3 years included lower than average selloffs, so it is not terribly unusual for 2015 to experience a higher than average drawdown. On average the U.S. stock market experiences a -10% or greater selloff every 18 months, and prior to the current one, the last selloff of that size was 46 months ago.

The second graph below shows the selloff and bottoming process in the S&P 500 Index that took place in October 2014. You can see that the selloff started in late September, moved down into mid-October, and then moved almost straight back up into the beginning of November. The whole process took a little over a month and formed a pattern that resembles a " V " shape. This type of straight down and up bottoming process is very rare and is not likely in our current environment.

The third graph below shows the selloff and bottoming that took place in late summer of 2011. This selloff started in late July, moved down into early August, back up into early September, and then down again into the end of September before rallying back to its pre-selloff levels. This process took around 3 months and formed a pattern that resembles a " W " shape, with the second down leg of the "W" actually going below the first leg down. This is a much more common back-and-forth bottoming process and could be the type of process that the U.S. stock market has entered. Only time will tell if this is true, but know that the markets could be in for an extended period of struggle between buyers and sellers before its next major move begins.

The last graph below is year-to-date chart of the S&P 500 Index through September 1st. The blue line shows that the market started off well but then wiggled back and forth with no real progress from February to mid-August. Then the volatility showed up almost out of nowhere, and of course that is still continuing. There are a high number of probable scenarios that could play out from here, but one of the most healthy for the long term would be a period similar to 2011 that would include some time of sideways and volatile action before the next major trend begins.

Regardless of what happens, we will continue to evaluate the current environment and look to make adjustments as warranted.

We hope you found this helpful.  We'll be back in touch soon!