Absence (Of Market Volatility) Made The Heart Grow Fonder

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Absence (Of Market Volatility) Made The Heart Grow Fonder
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Investors loved financial markets while market volatility was noticeably absent. But now it’s back. Colin responds to your common questions, including what to expect.

Low volatility has been a feature of the U.S. equity market for several years. The absence of significant volatility and the surge in the S&P 500 Index drove investor sentiment to very high levels in 2017. Last year the S&P 500 Index was up almost 20%, yet January marked the fastest start for the index ever. Equity market indices reached our target for the entire year of 2018 before January even ended. This arguably set the stage for an overdue correction, which is what we have seen.

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I like to think of market corrections in terms of good, bad or ugly. Ugly corrections occur when there are deteriorating fundamentals in corporate earnings or economic growth, and stretched technical factors (such as momentum and valuation). A good correction occurs when only the technical factors are stretched but the fundamentals are solid or improving. This is the case today. Momentum and valuations are high, but we have rising corporate earnings and improving consumer sentiment. Releasing some of the exuberance is healthy for the market. Predicting exactly where the market will correct to is difficult, but generally I assume if the S&P 500 Index falls 5%, it has a reasonable chance of falling