5 Facts to Remember During Market Volatility

5 Facts to Remember During Market Volatility

Wouldn’t it be nice if the stock market didn’t have such violent swings in either direction? Especially the dramatic downward plunges - we’d ALL like to avoid those! But the reality is, the markets include a certain amount of volatility, and keeping those market swings in perspective is important. Here are five facts to remember when the market gets bumpy: Be Wary of Headlines Quoted in Points It’s common for the financial media to quote changes to market indices – specifically the Dow Jones Industrial Average – in terms of points. Why? Because a large point change sounds scary, and scary makes people pay attention to graphics like this:

Pay close attention to what that point change REALLY means. In reality, a 340-point change in the Dow only equals about +/- 1% change based on current levels of around 34,000 (as of September 2021). When the Dow was at 10,000, a 1% move is only 100 points. It’s all relative, and important to view numbers IN CONTEXT.

Look at the Bond Market

It’s difficult to determine if a market downturn is the start of the next recession or simply a bad day. Turns out the bond market can offer some peace of mind when volatility flares up. To gain some insight into underlying economic conditions, we can turn to the Treasury spread (to learn more about Treasury spreads, please read this Investopedia article.) When spreads go higher, that implies improving economic conditions (bullish sentiment); conversely, when spreads go lower, that implies deteriorating economic conditions (bearish sentiment). Here’s why it matters: Treasury spreads have correctly anticipated the last six recessions (red circle), dating back to 1976. Critically, if Treasury spreads drop below zero, that’s not a great sign. It doesn’t happen often, but there’s genuine cause for concern when they do.

Melissa MinterMay 16, 2022

Overview

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The year began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade war between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.

While domestic economic growth may have slowed in 2019 compared to 2018, it showed resilience and stamina. The third-quarter gross domestic product expanded at an annualized rate of 2.1% — moderately down from 2018's 3.0% rate, yet still strong enough to outpace global economic growth by a considerable margin. Consumer spending — which accounts for about two-thirds of the U.S. economy — surged, buoyed by a strong labor market, near-record unemployment, solid wage growth, and a burgeoning stock market. All told, the domestic economic expansion continued into its 11th straight year, the longest run in U.S. history.

Last year saw trade disputes between the United States and several of its trade partners reach an accord, but the trade war with China roared. The world's two largest economies engaged in a tit-for-tat skirmish, with each country volleying tariffs on their respective imports at the expense of the exporting nation. Coincidentally, a limited deal was announced just before the holiday shopping season, with the U.S. agreeing to forgo new tariffs and China assenting to allow more U.S. agricultural imports. Further negotiations are presumed, but the relationship between the economic giants remains tenuous at best.

Not only did the ongoing trade war affect global economies, but it also impacted domestic business investment, industrial production, and exports. Part of the justification cited by the Federal Reserve for lowering interest rates three times last year was weakness in business fixed investment and exports. As of November, new orders for durable goods were down 1.3% from the same period in 2018, and business (nonresidential) investment fell 2.3% in the third quarter.

The new year begins with a strong stock market and solid economic growth. The Secure Act, passed in late December, should change the retirement planning (and saving) landscape to some extent. However, the Treasury budget deficit for fiscal 2019 (October 2018-September 2019) exceeded $980 billion — 26% higher than the 2018 fiscal-year deficit. The trade war with China may cool with more mutual concessions, or accelerate, which would continue to dampen global economic growth. The new year will begin with the impeachment process and end with November's presidential election. What happens in between is anyone's guess. Will unemployment and inflation remain low? Will stocks continue to experience growth? Will oil and gas prices moderate or surge? Will the domestic economy continue to accelerate, or suffer a setback? Can the world economy recover, or will it continue to stagnate? If nothing else, 2020 looks to be an interesting year.

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5 Facts to Remember During Market Volatility

Overview

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