What’s going on with the financial markets? Specifically, what’s behind the price swings of the past several weeks? And, more important, how should you, as an individual investor, respond?
To begin with, the recent volatility was not really all that extraordinary. The daily drops pushed U.S. stocks down about 10% from their recent record highs, although they have regained some of that ground. A 10% drop represents a “correction” – not a crash – and historically, corrections have occurred about once a year.
So what seems to have caused these market jitters? Here are the key culprits:
Anticipated slowdown in economic growth and corporate earnings. The stock market is forward-looking – investors make decisions based on what they think will happen. And right now, many investors are anticipating a slowdown in economic growth (partially due to higher tariffs and trade disputes) and corporate earnings (as the jolt from the corporate tax cuts begins to fade). We may still see reasonably strong economic growth and corporate profits, but possibly not at the same level as we had for much of 2018.
Rising interest rates – The Federal Reserve raised interest rates in 2018. While higher rates are not bad for all market sectors, they can slow the expansion plans for many businesses, resulting in reduced growth prospects. The Fed may continue its gradual rate increases, but investors are closely watching for any signs that might lead the Fed either to pause or increase rates more rapidly.
Slowing global economy – The global economy is growing more slowly than expected, resulting in lower returns for international stocks and a particularly sharp decline in emerging markets.
While it’s useful to understand the factors causing the recent stock market gyrations, you’ll want to focus primarily on what you can control. Consider these suggestions:
Keep realistic expectations. Try to maintain realistic expectations about how your investments are likely to perform over time. After five years in which the S&P 500’s returns have averaged almost 14% per year, we may well be in for a period of more typical returns, possibly in the 5% to 6% range. As always, though, there are no guarantees when it comes to anticipating the performance of the financial markets.
Review your mix of investments. From time to time, and sometimes in response to changing market conditions, you may need to change the mix of investments in your portfolio. So, for example, if higher market volatility makes you uncomfortable, you may want to consider adding bonds or other fixed-income vehicles, as these types of investments tend to stabilize stock-heavy portfolios during turbulent times.
Don’t get scared away from investing. You may not like seeing multi-hundred-point plunges in the Dow Jones Industrial Average, but don’t get scared off from investing. After all, recent stock market history has taught the value of patience: If you had given up on investing in March 2009, at the market’s low point in the Great Recession, you would have missed out on the 300 percent gains achieved before the current round of volatility. Of course, the market’s past performance can’t guarantee what will happen next.
The financial markets will always fluctuate – sometimes violently. But as an investor, you should strive for calmness, patience and discipline – because these attributes can help you look past today’s headlines toward the future you envision.