Mar­kets get jumpy again; in­vestors should keep their nerve

The Oklahoman (Sunday) - - BUSINESS - BY STAN CHOE AND SARAH SKIDMORE SELL AP Busi­ness Writ­ers

NEW YORK — So this is what all those mar­ket watch­ers meant when they said the stock mar­ket was quiet ... too quiet.

The vi­o­lent moves for stocks over the last week have been par­tic­u­larly jar­ring for in­vestors be­cause they'd been sail­ing through un­usu­ally calm trad­ing and strong re­turns for more than a year. It was a re­turn to more "nor­mal" con­di­tions — but much like step­ping out of a sooth­ing, warm shower on a cold win­ter morn­ing.

Ex­perts are say­ing even more volatil­ity may be on the way. The mar­ket is wor­ried about the threat of higher in­fla­tion and in­ter­est rates, and it's also con­cerned that stock prices have be­come too ex­pen­sive fol­low­ing their huge run. Many still ex­pect stocks to gain over time, in part be­cause the global econ­omy is strength­en­ing and re­cently passed tax cuts should give an ex­tra boost to cor­po­rate prof­its. But a drop for stocks in the near-term may well be a restora­tive thing.

"This pull­back is sim­ply help­ing to get some of the froth out of the mar­ket," said Tim Ar­mour, chair­man and CEO of Cap­i­tal Group, which runs some of the world's largest mu­tual funds un­der the Amer­i­can Funds name. "Some volatil­ity is a nat­u­ral part of in­vest­ing, and it is healthy for mar­kets."

The nearly 8 per­cent drop for S&P 500 in­dex funds from two Fri­days ago through Mon­day was the first loss of even 5 per­cent in a year and a half, a record amount of time. For younger in­vestors, this may be their first bout with mar­ket volatil­ity.

Calm mar­kets have be­come such a given that in­vestors poured dol­lars into prod­ucts that made money if ex­pec­ta­tions for volatil­ity re­mained low. They did this by in­vest­ing in the fu­tures mar­ket for the VIX in­dex, which mea­sures how wor­ried traders are about a drop in stocks, and of­ten used bor­rowed money to do so.

But some of th­ese seem­ingly can't-miss prod­ucts blew up in the past week af­ter volatil­ity spiked and lost as much as 90 per­cent of their value. Some mar­ket watch­ers blame the break­down of th­ese es­o­teric in­vest­ments for ex­ac­er­bat­ing volatil­ity and ac­cel­er­at­ing Mon­day's sell-off in par­tic­u­lar, when the S&P 500 lost 4.1 per­cent.

So, what would a re­turn to "nor­mal" volatil­ity en­tail? For one, ex­pect more down days for the mar­ket. Sec­ond, ex­pect those losses to be big­ger than they have been.

From the start of 2017 through Jan­u­ary of this year, a typ­i­cal down day for the S&P 500 meant a loss of 0.2 per­cent. Half the losses for the in­dex over that time were more than 0.2 per­cent, and half were less. But over the last 20 years, a down day for S&P 500 in­dex in­vestors was roughly three times as bad, with a me­dian loss of 0.6 per­cent.

The swings may even be more no­tice­able within a sin­gle day. Dur­ing the calm stretch of 2017 into Jan­u­ary, a typ­i­cal day for the S&P 500 saw it drift just 0.5 per­cent­age points from its low point to its high. On the first day of this year, for ex­am­ple, the S&P 500 held tight be­tween a gain of 0.3 per­cent and 0.8 per­cent.

Over the last 20 years, though, the typ­i­cal trad­ing range was more than dou­ble that, at 1.1 per­cent­age points. So think of a day like Elec­tion Day 2016, when the S&P 500 flipped be­tween a loss of 0.4 per­cent and a gain of 0.7 per­cent.

One nat­u­ral re­ac­tion to in­creased volatil­ity is the in­cli­na­tion to get off the wild ride and sell. If you have a long time hori­zon for the in­vest­ment, say a decade, the gen­eral rec­om­men­da­tion is to re­sist that temp­ta­tion. Stocks have his­tor­i­cally of­fered some of the biggest re­turns over the long term for in­vestors.

In­vestors who want less volatil­ity should be in bonds, sav­ings ac­counts or other in­vest­ments with less risk. The trade-off is that re­turns over the com­ing decade will likely be lower.

"Stocks do go up and down, this is nor­mal," said Roger Young, a se­nior fi­nan­cial plan­ner at T. Rowe Price. "It is some­thing that, if you have a long-term out­look, it shouldn't worry you too much."

Brian Arm­strong, a 46-year-old in Ti­gard, Ore­gon, is think­ing along those lines. He's will­ing to ride through the ups and downs of the stock mar­ket and isn't look­ing to make a flurry of moves in the short term. To scratch that itch, he plays in the cryp­tocur­rency mar­ket, which is fa­mous for be­ing even more volatile than stocks.

"I hold stocks, but mine are for the long term," he said. "I'm mak­ing the con­scious choice not to mon­i­tor (the stock mar­ket) on a day-to-day ba­sis."

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