Volatility is Normal, 2017 Was Not
posted on Thu, Feb 08, 2018
I apologize ahead of time for all the numbers in this post! I promise it is for a worthy cause and it will make sense at the end!
It is February 8, 2018 and there have been 27 days the stock market has been open in 2018. This week feels like whirlwind. There have been 2 days (including today) where the S&P 500 (an index that tracks the largest 500 U.S. based companies) dropped over 3.50% in one day. I have been fielding a lot of questions and one of the more popular ones is, “Is this normal?” That is usually followed up with, “What do I do?”. I’ll do my best to help answer both questions.
Is this normal?
The short answer is yes. But you don’t have to take my word for it. I’ve done some research! There are a lot of ways to talk about volatility, but at the end of the day most people are concerned with how often their portfolio goes down. And more importantly, how often does it significantly goes down. I went back and tracked every day of the S&P 500 from 2000 – 2016. That is 4,267 days the market was open. Out of those 4,267 days, the S&P 500 dropped 1% or more 619 times (14.51% of the time) and it dropped 2% or more 195 times (4.57% of the time). To simplify, in an average month the S&P 500 dropped 1% or more 3 times and 2% or more once. It is normal for the stock market to go down significantly.
So far in 2018 (including today’s drop of 3.75%), the S&P 500 has dropped 1% or more 4 times (14.81% of the time) and it has dropped 2% or more 3 times (11.11% of the time). The 1% drops are right on the average from 2000 – 2016. The 2% drops are about double the average, but it is also a very small sample size.
The longer answer is yes, 2018 is very normal. 2017 was not normal at all and it is fresh on everyone’s mind.
In 2017, the S&P 500 dropped 1% or more only 4 times (1.59% of the time) and it never dropped below 2%. It is by far the year with the least amount of 1% drops since 2000. The next closest is 2006, when the market dropped 1% or more 5.18% of the time. 2017 was far from a normal year and we may not see another one like it for a very long time.
What do I do?
The short answer is nothing if you are investing for a goal or over a period of time. A sound investment strategy knows all the statistics I listed above and takes that into account going in. If you don’t have an investment strategy that is built for a certain time or goal, this would be an appropriate time to evaluate why you are investing and maybe sit down with an investment advisor.
Please feel free to contact me anytime to discuss this topic or any other in more detail.