Recent Stock Market Volatility Not All Bad

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Financial planners recommend investing for the long term. | Photo by CafeCredit via Flickr

After more than a year of rising stocks, the market grew volatile last week. But according to Adam Sherman, senior partner at 1847Financial, that’s not necessarily bad news.

Feb. 5 started the dizzying week with a 4.6 percent decline, then rose 2.3 percent the next day. On Feb. 8, the market dropped again, by 4.2 percent, raising alarm bells for a possible correction — a 10 percent drop in stocks. The week ended with the market rising on Feb. 9, ending on a slightly higher note. And early this week, the market saw another jump.

According to Sherman, volatility and the declines, against the backdrop of an overall strong economy, might be more correction than the beginnings of a massive sell-off.

“The market has had a pretty good period over the last year, particularly the month of January, which was one of the best months the market had seen in over five or six years,” said Sherman. “The market maybe got a little in front of itself from an evaluation standpoint. This adjustment or correction is just allowing the market to reset itself a little bit.”

Though last week saw one of the largest single-day point drops in stock market history, percentages are more important. A 1,000-point drop hurts less when the market is as strong as it was to begin with.

More time is still needed to be sure, but for now, Sherman said, it appears that there was a brief correction last week, and the main takeaway is that the market is volatile right now.

Corrections have historically occurred about once a year and do not on their own indicate a recession, which is a longer period of slowed economic activity.

Sherman said most in the financial community are not surprised by the correction, and some even say that an adjustment might be good for the market. But living through it is not fun, for both the professionals and their clients, who may be tempted to question the integrity of the market.

“Interest rates have been moving up, which is a sign that economic times are actually pretty good in this country,” Sherman said. “We’re basically at full employment at this point. When interest rates go up, it means there’s a little bit of inflation in the market. There’s been some pressure on wages, and the markets generally don’t like higher interest rates.”

In other words, low unemployment — the United States had an unemployment rate of 4.1 percent in January, below the 4.9 percent natural rate of unemployment — makes it harder to hire employees and puts pressure on wages to go up. Interest rates have also been going up, which creates less attractive stocks.

Since President Donald Trump’s election, there have been 14 months of a bull market, when share prices rise and encourage buying, said Daniel Weiss, co-founder of the Tundidor & Weiss Investment Group. Until the market evens itself out, this market volatility might just be the new norm.

“We’re talking about the market as this tangible thing; it’s really an intangible thing, of course,” Weiss said. “We’re talking about the market trying to find who it is, in a sense, and where it should be. A lot of things are coming to fruition right now, and it’s just trying to find its bearings.”

Weiss said he advises clients to stay in the market for the long game. Some years are high and some are low, but the overall trend is that the market goes up. Staying in for the long term ensures that, despite any short-term volatility, clients make money.

Weiss said his clients in particular are older, and therefore, more risk-averse. He emphasizes the importance of a diversified portfolio in order to soften the blow of losses.

Peter Hecht, executive vice president and wealth management at the Hecht Investment Group of Janney Montgomery Scott, said long-term investors just need to have patience.

“It’s the natural process of a market,” Hecht said. “It doesn’t go up and up and up forever. It was up very strongly during the Obama years. It was up over 200 percent during the Obama years, and once we started off with Trump, it continued to go up. It has to take a breather somewhere.”

Though there might be concerns, Hecht said, no one is looking to jump out the window, and they shouldn’t. In times of financial turmoil, it helps to have a game plan, remind yourself why you own what you own and that everything is relative, learn from your mistakes and have an ample amount of cash on the side. Take it easy, Hecht said, and don’t panic. Generally speaking, you’ll see greater returns if you stay in the market rather than trying to jump in and out.

“I can tell you this: The economy is still strong,” Hecht said. “Interest rates are still low, even though they’re bumping up a little bit. Earnings from S&P 500 companies are over 80 percent reported at or better earnings than expected. So we still think, going forward, that things look positive.”

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