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Smoothing a Rocky Road
Looking Back at an Unusual 2017 Puts Today's Volatility in Perspective
There have been plenty of noisy storylines competing for our attention in the media so far this year.
One that's resonated with investors and the market has been the re-emergence of volatility – something that was unusually quiet in 2017.
In the first quarter of 2018, the S&P 500 logged more than 23 days of price moves greater than 1%. Since peaking in late January, the index averaged a 1% swing almost every other day through March. Compare that to all of 2017, which saw a total of just seven daily price swings of 1% or more. In fact, from November 2016 through January 2018, the largest multiday peak-to-trough decline for the S&P 500 was less than 3%. So far this year, the index has experienced multiple single-day drawdowns larger than that.
ADJUST YOUR REAR-VIEW FOR CLEARER PERSPECTIVE There's no question that the volatility of 2018 feels extreme relative to 2017. However, taken in the broader context of the past 20 years, things today look and feel much more normal. In the 18 years leading up to 2017, the S&P 500 experienced daily moves of at least 1% between 29 and 133 times per year, with the median year seeing 65 such moves. This year volatility may be off to a faster start, but not excessively so.
Looking ahead at the remainder of the year, there's really little reason to expect volatility will decrease anytime soon. Between uncertainty over the impact of interest rate hikes by the Fed, surging earnings expectations that leave little room for economic disappointments and a midterm election cycle that already is off to a surprising start – all things that would normally signal volatility ahead – it would be unusual not to see outsized swings in the stock market. However, given that prices seem to have gotten ahead of the fundamentals (thanks, in part, to the outlier year that was 2017), a period of consolidation may well be worth it even if the day-to-day bumps in the road make us uncomfortable.
In turbulent conditions, it can be hard to focus on the information that's important and ignore all the extraneous noise. A disciplined approach to risk management can help, and that is exactly what our Weight of the Evidence approach is designed to provide.
Weight of the Evidence:
OVERALL EVIDENCE STILL NEUTRAL
FED Policy
Fed has mapped out rate normalization path for 2018.
Economic Fundamentals
Economic data has fallen short of expectations, but a positive growth trend remains intact.
VALUATIONS
1Q earnings reports have come in above expectations at a time when good news is already priced in.
SENTIMENT
Investors are broadly pessimistic about market performance.
SEASONAL PATTERNS AND TRENDS
Increasing headwinds heading into the midterm elections with control of Congress in doubt.
BREADTH
Longer-term breadth trends suggest continued caution remains warranted.
For the latest Weight of the Evidence summary and other timely market insights, visit our Markets & The Economy page.
Bruce Bittles, Chief Investment Strategist
Willie Delwiche, CMT, CFA Investment Strategist
You can follow Willie's insights via Twitter @WillieDelwiche.
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