Stocks Are Down! Or Up! Or Maybe Both???
Which of these statements is true for the period January 1 to February 16, 2018?
1. Stock returns were bad, down 4.7% from the previous high.
2. Stock returns were good, up 2.5% in less than seven weeks.
Well, both statements are true. A $100,000 investment into a S&P 500 Index Fund on January 1 would have:
- Declined 4.7% from its previous high,
- Increased 6% from its Year to Date low and
- Increased 2.5% for the period January 1 to February 16.
Stock market volatility has been high this year. Stocks declined 10% for the first time since 2016. That caused near panic in many commentators. Then stocks recovered, still lower than January 26 but higher than January 1.
My opinion: Volatility should be expected. A 10% decline from a previous high is not unusual. Historically, 10% declines averaged once a year. And a 2.5% increase in less than seven weeks is good news.
Does this tell us anything about prospects for the rest of the year? Doubtful. Short-term movements in the stock market are usually not very meaningful and certainly not predictive. For instance, compare this year’s S&P 500 Index return with 2016.