Beware of Volatility in Your Investments

Market Watch provides some useful insights in their article about stock market volatility.

Talk about a tough trading environment.

Analysts at Bespoke Investment Group, as illustrated in the tweet below, noted Tuesday that the S&P 500 index’s SPX, 2.07% average absolute daily percentage change over the past five weeks has been plus or minus 4.8% – a historic achievement.

“That’s higher than we saw at the height of the financial crisis, after the 1987 crash, and in the late stages of the Great Depression. The only time the S&P’s average daily move over a five-week period was greater was after the Crash of 1929,” the analysts said in a note.

They go on to say that upswings, as well as downswings, have been responsible for the higher volatility. Although some might be able to or be lucky enough to make money on the continual swings in the market, most investors will be wise to avoid trying to avoid the market for short term investments. In fact, many investors will be wise to take a look at our article about how to invest for a ten year recession!

What Can You Predict about Your Investments in This Volatile Market?

Our greatest concern is that we may have only begun the slide of the market. Factors that will affect how long this lasts will be the duration of the pandemic, if it returns from time to time, and how severe it will eventually be for the first part. Then the question will how badly does this hurt the economy, which companies and individuals will be taken down by debt, and the degree to which the Federal Reserve and congress work to alleviate the current economic situation and stay ahead of the forces that would destroy the economy in the USA and around the world.

Traders are reacting to hope of things getting better in a hurry as well as dreading that things will be a lot worse.

All Investments Are Not Equally Volatile

The VIX volatility index is looking at the overall market. But, not all stocks are as volatile as the S&P 500 or the Dow. We recently mentioned dividend stocks that hold the promise of a refuge in the storm. It may be difficult deciding when the time to invest will be but there are investments that are not at the same risk as the rest of the market and these may be the best choices now and as a recovery starts.

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Beware of Volatility in Your Investments – DOC

The Stock Market Crash that Ended the “Roaring Twenties” Stock Market

The 1929 stock market crash that ushered in the Great Depression was not a one day event and was not confined to October of 1929. There was a 10% correction of the market in March of 1929. And, the market came down 30% from its former high during the month of September. Then the market had three terrible days on Black Thursday, Black Monday, and Black Tuesday. On Black Thursday the market fell 9% before it rallied to “only” a 2% loss. In fact, the market recovered on Friday. But, on Black Monday it fell 12.6% followed by another 11.7% loss the next day, Black Tuesday.

Although the Dow fell more than 22% during the “Black” days, it continued to slide and have significant bad days for the next three years! The Dow Jones Industrial Average stood at 305 as the market opened on Black Thursday and by July of 1932 it was down to 41.22 for an 89.2% loss from its early September high of 381.17.

The stock market had been appreciating at about 20% a year during the 1920s and buying on margin was very popular a “playing the market” always seemed to be a good thing. In was, in fact, after the end of the market slide that Benjamin Graham introduced the concept of intrinsic stock value.

Lessons from Previous Stock Market Corrections and Crashes

To the extent that a market is overbought and overpriced, there will be a substantial correction and then a relatively prompt recovery. To the extent that there are underlying problems as well (such as those of the housing crisis in 2008) the effects will be worse and the recovery slower. The two prime examples are the dot com crash and the 2008 crash. The other aspect to watch is that the market prices in expectations. Now that investors are expecting worse days ahead, they are selling and driving prices down. When they start to see a brighter future, the market will rise ahead of the conditions of the day. Investing in stocks always has to do with predicting the short and long term future.

The Value of Perspective in Investing

The old saying is that there is never anything new as everything has happened before. With that thought in mind, we read about Warren Buffett’s comments about the double whammy of the coronavirus and oil price war.

According to Market Watch, Buffett is less concerned now than in 2008.

“If you stick around long enough, you’ll see everything in markets,” he said from his Omaha headquarters. “And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”

While it may have been scarier in 1987 and 2008, at least to Buffett, there’s no denying that it’s been a brutal stretch for investors. On Monday, the Dow Jones Industrial Average DJIA, -4.896% dropped more than 2,000 points before recouping a chunk of those losses on Tuesday.

Of course, as we noted in our article about Buffett’s silent warning for investors, he is sitting on about $120 billion in cash and waiting for prices to come down to where he will start to buy.

The points we would like to make are these. The slide of the market could be longer and more severe than many could ever imagine. And, there is always a recovery once the bloodletting has ceased. Those who preserve enough cash to invest once the market has bottomed out will find excellent values that will reward them for years to come.