Volatility Returns to the Market

In 153 Days and Counting, we mentioned a USA Today article noting the market hadn't had a 2% selloff since last July, and wondered if that held any implications that a selloff could be looming. After all, it was the 2nd-longest streak of its kind on record. Before most of those newsletters could even be delivered, we got just such a day on February 27, and the volatility has since extended into March with several fairly sharp moves up and down.

For some investors, these types of sharp moves can be jarring. That's probably true now even more than usual, simply because we've had a stretch of almost unprecedented calm in the markets in recent years. Despite the pullback last summer, the major market indexes haven't had a correction—that is, a drop of 10% or more—in the past 4 years. That's the 2nd longest streak of all time.

When the markets rise steadily, month after month, year after year, it's easy to begin thinking that's normal. It's not. Stocks typically move higher in a two steps forward, one step back fashion. It's unusual to go multiple years without a significant correction. In fact, it's perfectly normal to get about one 10% correction per year. That's the long-term average. Sharp daily moves really shouldn't come as a big surprise either. Despite the fact that we'd gone many months since the major market indexes had experienced a 2% daily selloff, the reality is that over the past 75 years, daily declines of 2% or more have occurred roughly eight times per year, on average.

We don't report this to scare anybody. Quite the contrary. If you know that it's normal for stocks to pull back by 10% or so roughly once per year, it's a lot less scary when it happens. Knowing that 2% daily market moves really aren't that unusual helps us stay calm when they occur after a year of smooth sailing.

The significant gains the stock market has provided in the past have occurred in spite of this type of short-term fluctuation, not in the absence of it. So if you're a newer investor, or an older one who has simply been lulled to sleep by the past few years of unusually calm market action, don't be overly concerned about the increased market volatility over the past month.

We know that the timing of the next correction, even the next bear market, is a matter of when, not if. Every bull market is followed by a bear market, and round and round the market cycle goes. Investors who have stuck with their long-term investing plan through past market corrections have been handsomely rewarded. If you stick with yours, you likely will be, too.

• 153 Days and Counting
• How to Take Market Turbulence in Stride
• Make Sure Your Investment Decision-Making Is Inside-Out

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