Volatility Is Back

We sent the following note to clients last week ...

January lulled investors into hoping that 2018 would be as calm and profitable as 2017. February has provided a jolt.

On Monday, the S&P 500 index dropped 4.1%, the highest one-day drop since August 2011. For February, the S&P is down 8.5%. The S&P’s record streak of fifteen straight positive months appears in jeopardy.

The media is amplifying fears by trumpeting misleading headlines – Monday’s record 1000+ point Dow drop – and scrambling to identify the culprit – rising interest rates and inflation.

Yes, based on points, the Dow’s drop was a record. But by the more candid measure – percentage – Monday was only the 108th worst drop in the Dow’s history. Case in point, the Dow lost more points on Monday than it was worth in 1984.

There may be some truth to the rising rates and inflation story. However, the world does not look much different than it did ten days ago. Emotions have much more to do with short-term prices than economics or fundamentals.

To help put the last week in perspective, here are a few interesting charts:

·         Figure 1 shows asset class returns in February, year-to-date, and since the beginning of 2017.

·         Figure 2 shows the S&P’s performance in February next to its performance since the start of 2017.

·         Figure 3 shows the results following every day that the S&P lost more than 4% over the last 20 years. Over long periods, we have good reason to be confident that we’ll see a return for the risk we bear. Investing requires patience and discipline.

Figure 1

Figure 2

Figure 3