Volatility: Rolling with the Tide

David Morgenroth

David Morgenroth

Post written by David Morgenroth, Stockman Wealth Management Advisor in Missoula

It seems like yesterday everything was smooth sailing in the stock market. On January 26, the Dow Jones Industrial Average hit its 11th record close of 2018 – that’s 11 out of a total of 18 trading days.

On the same day, the S&P 500 Index (of the best large U.S. companies) hit its 14th record close of the year. And this was an extension of a virtually uninterrupted move up throughout 2017.

Then things changed:

Source: www.telegraph.co.uk

OK, so the stock market hasn’t quite morphed into a horror movie, but things sure are choppy (no ax required; pun intended).

But what is volatility, exactly? Merriam-Webster defines stock market volatility as “a tendency to change quickly and unpredictably.”[1] For most people, that would be a good way to describe the stock market in general. But the market is a bit like life – easy going for a while (like most of last year), followed by pockets of turbulence (like now).

Sometimes it’s hard to figure out why the market moves and media outlets like CNBC are happy to supply reasons and pontifications, not to mention forecasts. There are a lot of things in the larger world that carry the potential to affect markets, such as changes in the economy, interest rates, major legislation, or on a micro level the fortunes of an individual company. But the market has its own narrative, and for events to have an impact, the market has to digest the news and figure out how it fits into the narrative.

When I use the term “market,” I mean market participants, including everyone from mom-and-pop investors to big financial institutions. That’s a pretty sizeable range of players, encompassing all levels of skill, knowledge, and experience. And not everyone comes to the market with the same intention – well, most want to make money, of course, but some are hedging risks they have elsewhere, and some are just gambling (with no risk management whatsoever). In the end, everyone brings their own story to the market.

And that’s where the market story or narrative comes in. The market is a conglomeration of all of our emotions, beliefs, and behaviors, and together we create a collective narrative that dictates not only the direction of the market but how the market will react to the news.

President Trump’s election offers an excellent case study. On election night in November of 2016, when it began to look like Trump would win, the Dow Jones Industrial Average stock futures plummeted to minus- 900 points at one stage. The election surprise caught the market flat footed, but by the next morning the market had latched onto the positives of the President-elect, and the bull market reignited. The market proceeded to ignore Trump’s tough trade talk for over a year until the administration established tariffs recently on a multitude of products, including $50 billion of Chinese products. The market took notice.

Ultimately, the market lives on an old adage: Things don’t matter until they matter. In a long bull market like we have experienced, a lot of bad news is ignored (such as the North Korean nuclear threat) and buoyant sentiment allows the rising tide to lift many if not all boats. Value investor extraordinaire Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” The tide just might be going out now, so look out!

Managing risk is the key to avoid being caught skinny dipping. This is where we at Stockman Wealth Management come in. We are here to help you define your personal financial goals and create a long-term plan to achieve those goals. Remember: It is our collective human emotional volatility that creates volatility in markets, and the fact that money is involved just intensifies that volatility. We as advisors can help you stay focused on your plan by allowing you to take a step back, objectively review your situation, and relax knowing that you are on track to achieve your goals.

[1] www.merriam-webster.com/dictionary/volatility

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