Pause Before you Panic (or How to Cope With a Looney Tunes Market)Submitted by Bryant & Brannock on February 6th, 2018
If watching the market over the last few trading days has you feeling like Wile E Coyote right after he unknowingly runs off the cliff, you are not alone. Way back on January 26, 2018 we were hitting record highs in the markets. The Dow Jones Industrial Average closed at 26,616.71 an all-time high. The S&P 500 Index closed at 2,872.87, an all-time high. In fact, the S&P 500 at the end of January had a positive monthly return for 14 out the last 15 months. The one negative month, March 2017, showed a loss (when accounting for dividends) of -0.04%. But what a difference 10 days makes.
The news, at least every channel we could find last night, was all about the all-time record point loss on the Dow Jones Industrial Average. From the close on Friday to the close on Monday the Dow fell 1,175.21. It is the biggest point loss ever, there’s no arguing that. What was frequently left out was this represents a 4.6% loss. That doesn’t even crack the top 25 of one day percentage losses on the Dow. The single largest one day percentage loss was -22.6% on Black Monday, October 19, 1987, this represented a loss of 508 points. The 12.8% loss on October 28, 1929, represented a loss of only 38 points.
Another index that we follow here that wasn’t mentioned much last night is the Chicago Board Options Exchange Volatility Index or VIX. The VIX is a measure of the volatility of prices in the overall market and is used for, among other things, pricing stock options. The VIX has been holding at historic lows and hit its all-time closing low of 9.19 on October 5th of last year. We started the year at 10.95. At the close last night the VIX hit 37.32 representing a nearly 240% increase for the year. So volatility is back, and it sure showed in the markets today.
The Dow Jones Industrial Average (DJIA) opened today down roughly 260 points from the close last night. Before the trading day was 30 minutes old the DJIA was up 358 points from the previous close. At 10:20 AM, less than an hour into the trading day we were negative again, 10:56 AM positive, 11:00 AM negative. At the close today we were up 567 points from the previous close. Looking at the chart at the end of the day we crossed the closing price 15 times today with a spread of about 1,160 points between the intraday high and low.
So what does all this mean? In the big investing picture there are generally two factors that you need to consider, these are volatility and inflation. In the short term volatility is your biggest risk. This has been made very clear to anyone whose been watching the markets over the last few trading days. Long term, the biggest risk to a portfolio tends to be inflation. If your investment portfolio is not at least keeping up with inflation you are losing purchasing power.
Keep in mind that, in the long term, your time horizon, your risk tolerance and your retirement expectations matter much more than the day to day fluctuations in the market.
If you have any questions or concerns about your current investment allocations feel free to call us.
Bryant & Brannock - 2/6/2018