S&P 500 rally needs to stay in perspective

The third quarter of 2018 just ended, and the stock market enjoyed extremely good returns during the period. The S&P

500 had its best performance in nearly five years, climbing more than 7 percent and setting record highs in the process. Several other benchmarks – including the Dow Jones Industrial Average and the Nasdaq Composite – have also given investors impressive gains.

Yet as impressive as a 7 percent return in a single quarter might seem, it just barely cracks the top 10 when you look at how the stock market has done over the past 10 years.

The reason why the S&P 500’s thirdquarter performance looks so good in comparison to recent history is that the stock market has been extremely well-behaved over the past several years. For a good chunk of that period, there was very little volatility, with steady gains interrupted only occasionally by downturns that quickly gave way to the prevailing long-term uptrend.

By contrast, coming out of the financial crisis in 2008 and early 2009, markets were on edge, and benchmarks saw a lot more volatility. The market didn’t always make big moves, but in 10 out of

14 quarters from late 2008 to early 2012, the market finished the quarter either up or down by 10 percent or more.

Investors need to be prepared for the possibility that more historically normal levels of volatility will return. That doesn’t automatically mean that markets will fall, but it does mean that investors need to be on their toes. Until then, it’s important to keep even solid quarters in the proper perspective.