But volatility upticks are normal, healthy and, to some extent, expected
Market volatility can be frightening, but also useful. Gyrating stocks are a good reminder to look at your portfolio with a critical eye. The key is to curb your emotions and not panic.
For the first couple of months of 2020, we continued to enjoy a nice advance in stock prices. With this type of market action, investors, analysts, the media and traders relax and forget what a down market looks like. This all changed in late February and March, when the DJIA was whipsawed back and forth (mostly back).
The DJIA At Its Worst
- On February 24th, the DJIA dropped 1,031 points
- On February 25th, the DJIA dropped 879 points
- On February 27th, the DJIA dropped 1,190 points
- On March 5th, the DJIA dropped 969 points
- On March 9th, the DJIA dropped 2,013 points
These five days are among the Top 7 worst daily point loss for the DJIA in history.
The DJIA At Its Best
Sandwiched in those worst-ever-point-drop days were these results:
- On March 2nd, the DJIA gained 1,293 points
- On March 4th, the DJIA gained 1,173 points
Those two trading days were the best daily point gains for the DJIA in history.
That’s the definition of volatility.
The Fear Index Spiked
As a result, the Chicago Board Options Exchange Market Volatility Index, often called the “Fear Index” or the VIX, has skyrocketed.
As of Monday, March 9th, the VIX hit 62.12, its highest level since the 2008 Financial Crisis. For comparison purposes, the VIX closed at 41.94 on the previous Friday and was in the mid-teens until the third week in February. And some are calling for the VIX to move into triple digits before the week is over.
Volatility is Not Always Bad
This massive amount of volatility can scare some people. Such huge movements can make you overthink your process and question your investments.
That isn’t a bad thing, though: Sometimes, it’s good to get a little shake to wake you up and re-examine what’s in your portfolio. Your financial advisor should also be constantly evaluating the risk level in your portfolio to makes sure your holdings are positioned appropriately.
What’s important to remember is that single-day events and even multi-day events of market weakness and volatility upticks are normal, healthy and, to some extent, expected. The streetlights still come on at dusk, the coffee still brews in the morning, and the dry cleaning still awaits pickup. Life goes on, no matter what the market does.
What Investors Can Expect
It’s unlikely that the DJIA will continue to swing by 1,000 points every day for the rest of the year.
But until the full effects of the coronavirus are more clear, uncertainty will continue and the markets will produce some large ups and downs.
In all likelihood, until confirmed cases in the U.S. and other developed countries begins to subside, anxiety will be high. Consider what happened in China as what might happen elsewhere: in China, new confirmed cases peaked in the first few days of February, which was pretty close to the bottom of the Chinese stock market drop. And since February 3rd, Chinese stocks have moved up more than 10%.
Further, use this time to make sure you are truly diversified. Everyone wants to talk about the DJIA, but if you have an allocation to bonds, for example, you have not fared as poorly as the latest headlines scream (bonds are positive since the middle of February, as the DJIA’s loss is in double-digits). And how many investors realize that international developed-market stocks have outperformed U.S. equities during this correction? So have emerging-market stocks.
What Investors Should Do
We must all look at the bigger picture. And days like the past two weeks make this point with a lot of fanfare. We all remember the waterfall-like stock slide during the 2008 financial crisis. Many investors lost their life savings. The pain became too much to handle. The DJIA seemed headed for zero. But that didn’t happen.
As investors, we must get up, dust ourselves off, and realize that, while a light might not always be visible at the end of the tunnel, that doesn’t mean it’s not there.