If you’ve been checking your investment account balances lately, you might be feeling a little confused. One day it’s up sharply; the next, it’s down. Then it’s up again.
What’s going on?
First, let’s get some context. These recent market swings—with the Dow Jones industrial average or “Dow” (which measures 30 of the largest stocks) moving up or down a few hundred points in a day—may seem unusual. But fluctuations in stock prices are normal. What’s unusual is the lack of volatility we’d gotten used to over the last few years. The VIX, an index that measures market volatility, hit an all-time low a year ago. Even with the recent fluctuations, the VIX is still below its 2015 peak.
It’s worth noting, too, that October has historically been the most volatile month of the year for stocks, so it’s not unusual to see big swings in the major stock indexes. Analysts at investment research platform Seeking Alpha found that of all the months of the year, October has historically experienced the largest swings in either direction for the S&P 500 index, which tracks 500 large stocks and is often used as a gauge for the market.
Remember that the Dow and the S&P 500 were in record high territory just a few weeks ago. The recent slump has left the Dow about where it was four months ago, and the S&P 500 where it was in May.
How often does this happen?
This isn't even the first time stocks have slid in 2018. Back on February 5, the Dow had a single-day drop of 1,175 points. The next day, however, stocks were back on the upswing and had fully recovered by the end of the month.
Pullbacks of 2 or 3 percent, or more, are actually a pretty regular occurrence. Even veering into “correction” territory isn’t that unusual. Market corrections, defined as a 10-percent price decline from the 52-week high, have happened on average about once a year over history, according to a Deutsche Bank report. In each case, the stock market has bounced back and continued to climb.
Our last correction was about two years ago, and corrections have generally been quite infrequent since the Great Recession.
What’s the bottom line?
Remember that, even with recent bumpiness, the overall historical trend is positive. The market is still up pretty sharply from where it was even a year ago. And given the range of potential variables affecting the market—from the upcoming midterm elections to rising interest rates (which make debt more expensive for borrowers and bonds more attractive to investors)—there’s likely to be more volatility ahead.
So what to do during times like these? Take a deep breath. And avoid any emotional, knee-jerk response to the market’s movements. Remember, every single market downturn has historically ended in an upturn.
October 23, 2018