On Recent Volatility

The Japanese Central Bank raised interest rates for the first time in 17 years (to 0.25%) last week, which current news outlets are tagging as the reason for recent volatility. We mentioned in our July commentary that we always expect equity market volatility, and it’s not always a bad thing. On average, we see a 10% drop in markets, defined as a ‘pullback’, every single year. The causes are always impossible to pinpoint, as markets price in immeasurable amounts of information everyday as people buy and sell. Let’s take a few moments to quiet the noise and consider the recent market movements:

1. We expect a 10% pullback every year, on average, and we still are not there despite the recent trading days. The main reduction in market price has come from large technology firms, which make up a record amount of the global stock market capitalization.
2. The diversified, disciplined portfolio is in enjoying these summer weeks. Take a look at this chart showing 7/5 through 8/5: click here to view. Bonds are up over 3% and equity markets tilted away from the mega cap technology companies are not near the 10% pullback range. Also, smaller companies are positive.
3. Remember that 53% of market days have been positive, and 47% have been negative. The key is to ensure you’re around for that 6% delta over time.
4. Also, remember that the best market days are often right after the worst, or mixed within volatile times. March 2020, when COVID lockdowns were imminent, offered a merciless volatility. However, on March 24^th (my birthday…coincidentally?), the DJIA was up 11% in ONE day. That remains the best market day since 1933. If you reacted, sold, and missed that day, you’d have a negative return for the year. Similarly, Japan just saw a 10.4% single day increase after it’s worst day since the 1980s. History and markets don’t repeat, but they rhyme!
5. Closing with a repetitive message: timing equity market movements has a painfully high opportunity cost. If you miss the best 25 days from 1990-2021, the compound return is cut nearly in half to 5.55%. That’s the difference between turning $100,000 into $2.6 million and $100,000 into $560k. As Einstein said, “compound interest is the 8^th wonder of the world!” We prefer it works in your favor.

Discipline is imperative when the noise is the loudest. We work diligently to cut through it and ensure your plan and portfolio are appropriately linked together, whether a smooth market or turbulent. As always, reach out if you need anything!

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Sources: Ycharts,dimensional.com

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