When Markets Are Tranquil

Nearly halfway through, 2024 is becoming known for a lack of big, broad market swings. But we will inevitably see bigger swings at some unpredictable point. When that happens, how should investors approach it? In our view, now is the time to prepare mentally for bigger swings’ eventual return.

First, understand what volatility is. It isn’t just when markets tumble fast. Volatility is simply short-term market moves—up and down. What makes this disconcerting for many is it often comes out of the blue—volatility is inherently unpredictable. This is because sentiment drives volatility. People’s attitudes can change for any or no reason, driving big daily, weekly or monthly moves that follow no pattern and come with no warning.

So far this year, volatility is unusually quiescent—about half the average. Year to date, the MSCI World Index has seen 10 daily moves greater than 1%, up or down, which is only 8.8% of trading days in this stretch versus 17.9% over the span since 1980.^[i] For just -1% down days, there have been only 3, or 2.6% of year-to-date trading days, against history’s 8.6%. As for bigger daily moves, 2% or more (up or down), there haven’t been any for global stocks, which is also relatively uncommon given they occur 3.4% of the time. (America’s S&P 500 saw one 2% up day, but that is it.) Looking at longer negative periods, April’s -5.1% pullback was this year’s biggest point-to-point decline.^[ii] But that was only about half last August to October’s -10.4% correction, which is itself on the small end of bull market corrections.^[iii] History’s longest bull market, 2009 – 2020’s, had six larger than this.^[iv]

Market watchers are beginning to notice volatility’s absence. Some say it is merely hidden, that individual stocks are experiencing higher-than-average volatility, but because some zig while others zag, it doesn’t manifest at the broad index level. Some see that fearfully, noting it is a matter of time until the zigging and zagging don’t cancel. Folks, this is overthinking it, in our view. Volatility can’t be timed. Low-volatility periods don’t beget high ones—and vice versa. Past price moves, after all, never predict.

Instead of deep diving for meaning, we find it is much more helpful to prepare mentally for volatility during calm times. Start by reminding yourself that some degree of gyration is unavoidable if you own stocks. Of course it can be uncomfortable. Even big up days may seem unsettling when it feels like stocks are rising too far, too fast. Or when it invites press coverage saying such.

Markets often appear riskier when they are swinging wildly, prompting emotional swings in response—and calls for attendant portfolio moves to compensate. But we find reacting to past price movements, just to do something, is nearly always counterproductive. Unless you detect a bear market developing (when identifiable fundamentals few others see suggest a high probability of a prolonged drop exceeding -20%), steeling yourself to weather near-term chop is usually the wisest course of action.

Why? The flipside of greater volatility is higher long-term returns. The reason stocks can deliver high long-term returns is because they swing more in the short run. The returns you enjoy are the compensation for their risks. Think of enduring volatility as the price to pay for stocks’ returns. Those, in turn, can help defray the risk of outliving your retirement assets or otherwise failing to reach your financial goals. Keeping your eyes on the prize—why you are invested in the first place—goes a long way toward staying the course when the going gets tough.

Now, this may seem like cold comfort when your portfolio actually hits a rough patch. But volatility says nothing about a bull market’s end—or bear market’s beginning. The latter rarely start with a “bang” anyway. Successful investing isn’t about timing short-term swings. It is about owing stocks vastly more often than not to capture bull markets. Trying to outdance volatility makes you less likely to capture rallies, taking you further away from your financial goals.

Stocks generally experience positive volatility during bull markets. The S&P 500’s long-term returns are roughly 10% annualized, but the average return isn’t normal—it includes bear markets.^[v] Stocks have climbed in three-fourths of calendar years. During bull markets, excluding the current one, the S&P 500 averaged 23% annualized. This means, by definition, volatility is working in your favor much more often than not. If you need equity-like returns or something approaching them to finance your goals, this is a point to embrace.

Sharp wobbles average into stocks’ long-term returns over time. If you are investing for long-term growth, the goal is to harvest this. Staying disciplined in the face of volatility—not yielding to fear or greed—is key. So when sharper swings return, have a plan. If it drives your emotions up, step away from coverage or the financial news (but stick with MarketMinder). Exercise, call a friend, engage in a hobby—take some non-investment-related action that distracts your mind. This, in our view, is the healthy way to dodge the pitfalls volatility can bring.