Beginner’s Guide to Market Volatility

Why it's actually good for you that the US stock market has gotten less calm


For a long stretch of 2019 and early 2020, the U.S. stock market barely budged by more than 1%. And that's why, when the S&P 500 started to move up or down by at least this magnitude, it caught some people by surprise.

In fact, daily swings in excess of 1% are pretty common for the U.S. stock market: They happened on about 27% of trading days in the past 20 years, according to FactSet data analyzed by Grow.

But over a 12-month stretch starting in early 2019, the market was unusually calm, with 1% moves happening on just 13% of trading days. In fact, until late January, this benchmark went 71 days without a move of this magnitude. That calm was broken when the S&P 500 fell 1.6% one day, followed by a 1% rise the following day — and it has since seen six more similar daily swings.

"This is not unprecedented in the recent past, but it is surprising because it's not typical," David Joy, chief market strategist at Ameriprise Financial, told Grow in late January.

Joy pointed to 2017, which was especially tranquil. In the entire year, the S&P 500 rose or fell in excess of 1% on just eight trading days.

After a period of calm, like the market experienced from October until January, even the slightest hint of turbulence can take investors by surprise. Still, experts say that 1% moves are normal and should even be embraced by long-term investors. Here's why.

Moves up or down 1% often happen in clusters

Oftentimes, moves in excess of 1% are clustered. That's because traders are trying to make sense of some big news and what it means for the pace of economic growth and stock prices ahead. During those periods, the market slumps one day, then rebounds the next.

One recent example was in August 2019. In a six-day stretch, the market whipsawed up and down by at least 1% on a daily basis. The S&P 500 fell as much as 3.6% one day before rising as much as 1.8% a few days later. At the time, the bond market had flashed a warning sign about the U.S. economy, and there were concerns on Wall Street about a possible recession.

Late 2008 was also especially turbulent, as the U.S. economy was in the midst of a recession and stocks were in a bear market (defined as a decline of at least 20% from the most recent high). In a three-month stretch, the S&P 500 swung at least 1% on about 85% of trading days — although it's important to note that the market was up nearly as often as it was down.

The difference between a bear market, a recession, and a correction

Video by Courtney Stith

Prepare for more short-term bumpiness in 2020

Aside from ripple effects from news events like coronavirus, Joy told Grow in January that he expects the market could remain relatively calm ahead. That's because the pace of economic growth is "pretty steady" at about 2%, the job market is "relatively stable," and the Federal Reserve has stated that they intend to stay on hold with interest rates indefinitely.

And while two months have passed in 2020 so far, other market watchers believe the upcoming U.S. presidential election could cause some more short-term bumpiness.

"Typically with presidential elections, the market really starts to focus on them a couple months beforehand," Willie Delwiche, investment strategist at Baird, told Grow in November.

More broadly, experts believe the pace of economic growth to slow this year, which will also result in more subdued gains for the stock market. After the S&P ended 2019 up 28%, Wall Street strategists surveyed by CNBC still forecast that the index will finish 2020 almost 5% higher than its 2019 closing level, based on their median target.

How do economic cycles work?

Video by Courtney Stith

Market turbulence is good for long-term investors

The recent break from the calm is actually good for long-term investors, even if it can be difficult to watch the market lurch. While there are ways to manage your risks when investing, it's also helpful to recognize that ups and downs are normal and that turbulence can be a great opportunity to buy stocks at lower prices.

That's why experts recommend that you take advantage of a strategy known as dollar-cost averaging. This involves investing money into the market at set intervals, no matter whether the market is up or down. It simplifies the process, allows you to take advantage of normal price fluctuations, and removes any potential emotional bias.

Finally, remember that it's nearly impossible to predict the market's next steps — even for professional investors. That's why you're better off overcoming any investing-related fears, continuing to add money to the market, and giving yourself the longest possible time horizon to benefit from the market's long-term historical success.

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