Photograph of Chris Bouffard, CFA, Managing Director, Research Center, Financial Engines
Chris Bouffard, CFA, Managing Director, Research Center

We all knew market volatility would pick back up again and stock prices would dip eventually. It was inevitable after such an unusual stretch of one market high after another with record-low volatility. But why now?

  • Inflation and interest rates: Accelerating global economic growth is causing investors to revise their expectations higher for inflation, which in turn is pressuring interest rates higher.
  • Computer-driven volatility strategies: The rise in interest-rate expectations, and the market reaction adjusting to them, spilled over into a complex, risky investing strategy conducted by others. That strategy caused program-driven trading in volatility derivatives, which then spiked market volatility.

It’s been a long time since we’ve seen volatility like this, so as you listen to the news, please keep these things in mind:

We’ve seen this before. A lot.

When you look past the anomaly of 2017, market drops aren’t unusual. Take the S&P 500 index (and its predecessor) going back to 1928.1 On average, you’ll see the stock market drops -5% five times per year, -10% twice a year, and -15% once a year. Yet, it’s been a while — through the end of January 2018, it had been 19 months since a -5% drop and 15 months since slipping -3%.

We’ve got your back.

We stay on top of short-term events but we don’t overreact to them. Instead, both diversification and an appropriate level of risk are core to our philosophy. After all, investing is for the long term, and we’re here to help make sure your portfolio can withstand the inevitable market downs it will see. Along those lines, we adjusted many client portfolios back in August and again last month to reduce risk in those that had strayed too far from target.

We’re here to help.

If you have questions or concerns, please reach out to your advisor. We can help you make sense of it all.

[1] Source: S&P Dow Jones Indices LLC.
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