December 2017 Update: Get Ready for Some Volatility by Jack Moller

Not only have U.S. large-cap stocks (S&P 500) hit new record highs, but the advance has been so quiet that the new highs have been achieved with record or near-record low volatility.  (Note, when I use the term volatility, what I typically am talking about is swings both up and down in markets.  Yet, currently, when talking of low volatility I’m really focusing on the lack of any meaningful declines during this advance.) 

We have written/talked quite a bit about the fact that the market tends to have on average a decline of 14% once a year.  Furthermore, the market experiences a bear market (a decline of 20% or more) on average about once every five years.  These corrections and bear markets are to be expected.  As legendary money manager Peter Lynch said, “the real key to making money in stocks is not to get scared out of them.”  We simply need to more-or-less stoically ride out the periodic declines without panicking.   

Liz Ann Sonders, Schwab’s Market Strategist, recently wrote commentary on the current “melt up” in stocks and cited some astounding statistics.  In a nutshell the market is experiencing its:

•             Second longest bull market in history (i.e. time without a 20% decline)

•             Tenth longest streak without a 10% correction

•             Fourth longest streak without a 5% decline

•             Longest streak without a 3% decline – it’s been over a year

I find these numbers stunning and fascinating in the midst of all the perceived geopolitical risks as well as the rancor in Washington with our domestic politics.  More importantly, it seems to me that investors are likely becoming complacent since it’s been awhile since they last felt the angst of a moderate or meaningful decline.  It would not be surprising to see a typical, annual ~14%-ish selloff to trigger some panic.  Even more importantly, it is imperative that we have realistic expectations so that we don’t get caught up in any kind of panic ourselves.

So, the market calm won’t last forever.  We are overdue for a shift out of this low-volatility environment.  While no fun really, we don’t try to avoid the corrections.  The key is to stay the course and not get caught up in our emotions.

I still don’t know or care what the market does next.    

Last month I highlighted the fact that we are investing for the long-term through the implementation of our financial plans.  We essentially match the inevitable long-term market appreciation with our long-term financial goals.  The short-term market swings – whether minor corrections or sharp bear markets – are irrelevant to achieving long-term financial goals.  Accordingly, I don’t care what the market does next.  As I told clients back during the Great Financial Crisis, while things are difficult right now, I know the Dow Industrials are going to 50,000 or 75,000 in my lifetime (unless I suffer an untimely demise in which case I won’t care if I was wrong). The inevitable move to 50,000-75,000 was simple math and, as scary as those times were, I didn’t care if the Dow went to 5,000 first or not as long as I was on board for the massive long-term advance. 

So today, I do know we are getting closer to a selloff.  Yet, in the long run, I know it won’t matter so I don’t care.  I guess I should provide a caveat.  During most bear markets, investors’ emotions often get the best of them triggering bad decisions.  I only care to the extent that I hope to be able to take advantage of the mispricings that always occur when emotions take over.