What investors should do when stocks swing wide
Navigating the stock market is difficult enough when the sailing is relatively calm, like this year when the market is again flashing green and flirting with record highs.
When market waters grow turbulent, that’s the real test for stock investors trying to steer an investment portfolio into a profitable port of call.
That task proved difficult in 2018, the worst-performing year for the U.S. stock market since the financial crisis a decade ago. Consider these bearish Wall Street facts from 2018:
- The Dow Jones Industrial Average fell 5.6 percent.
- The Standard & Poor’s 500 stock index declined 6.2 percent.
- The Nasdaq Composite slid nearly 4 percent.
The biggest scare, however, came in December 2018, when the stock market suffered a scary freefall not seen since the Great Depression. The S&P 500 plunged 9.2 percent in last year’s final month, its worst-performing December since 1931. At its low on Christmas Eve, the broad market gauge closed down 19.8 percent from its Sept. 20, 2018, all-time closing high of 2930.75 — narrowly avoiding a bear market, or drop of 20 percent or more.
A sharp spike in volatility was a particularly ominous market trend and cause of rising investor fear at the end of last year. Stocks moved up or down more than 1 percent in nine trading sessions during the last month of 2018, compared to eight times total in all of 2017.
Fortunately, the U.S. stock market has stabilized early in 2019. The S&P 500 has rebounded 15 percent and is within 1.5 percent of a new record high. The Dow isn’t far behind, gaining more than 13 percent.
Dealing with stock market volatility
The wild price swings in the past six months offer Main Street investors a good lesson on market volatility, a condition where the financial markets move up and down, often at an alarming rate.
To gauge volatility, Wall Street-watchers use a financial barometer that measures stock market swings known as the VIX.
The CBOE Volatility Index, or VIX, which was created by the Chicago Board Options Exchange, is a benchmark number that reflects the market’s expectations for stock price volatility over the next 30 days. Basically, the VIX is the market’s way of measuring volatility, risk and investor sentiment (a big reason why the VIX is nicknamed the “Fear Index” of “fear gauge.”) The higher the VIX number, the more volatile the stock market.
In early April 2019, the VIX was trading below 13, its lowest level since mid-March. Compare that to the VIX in late December 2018, when it jumped to 36, and it’s apparent that stock prices have stabilized, investor fear has subsided and the threat of violent market volatility has abated – for now. The VIX topped 80 during the 2008 Financial Crisis.
Still, last year’s sharp sell-off is a reminder of how market sentiment can quickly turn pessimistic.
Is now a good time to buy stocks?
Ask a stock market expert and chances are you’ll get a more favorable outlook on stock prices than you would have at the beginning of 2019. Many of the worries and potential risks that spooked investors and sparked selling late last year on Wall Street have subsided.
“Yes, it’s still a good time to invest in U.S. stocks,” says Edgar Radjabli, managing partner of Apis Capital Management, an asset management firm specializing in volatility trading. “The economy is still strong, some of the fear of interest rates hikes being too much, too soon, has dissipated as the Federal Reserve has curbed its interest rate-hike outlook. Meanwhile, trade wars and tariffs have not seemed to make a significant impact on U.S. stocks, and the general stock market trend is an upward one.”
Others agree with that upbeat forecast, adding that as long as you have a solid long-term investment plan in place, buying stocks is usually a good idea as long as the investment meets your unique needs.
“Right now, some experts are calling for an imminent recession, but all indicators show that the economy is very healthy and is, in fact, growing at a favorable rate,” says Kyle Kroeger, a former investment banker and stock market blogger at MillionaireMob.com.
In general, investors should not strive to be market-timers, anyway, says Kroeger. “Investors need to stick with the facts and stay continually invested in the stock market, particularly U.S.-based stocks,” he advises.
[READ: How to trade stocks]
Gauging the ‘Trump Factor’
Economic policies coming from the White House are no doubt having an impact on the stock market right now, but investors shouldn’t place too much weight on what Team Trump is doing, money managers say.
“President Trump and his economic policies have certainly impacted the stock market both negatively and positively,” says Radjabli. “In the short term, his pro-business, less-regulation and less-tax approach boosted the market in 2017. However, the concern about tariffs and international trade dominated market sentiment in 2018 and did lead to significant volatility.”
Yet, the main reason the market was volatile in 2018 was because of concerns about rising interest rates, which was not related to Trump, Radjabli says. “In the long run, it’s unlikely that Trump will have a significant impact on the U.S. market,” he notes.
Investors should plow ahead, and live with the inevitable “good and bad” political outcomes that erupt in Washington, D.C., as politics is a fact of life on Wall Street, market pros say.
“Political policies always can and will affect the domestic and international stock market, both positively and negatively,” says Daniel Milan, managing partner of Cornerstone Financial Services. “The policies around tax cuts and deregulation have, and will continue to have, a positive impact on our domestic stock market, as there will be continued (spending on capital expenditures), stock buybacks and dividend raises.”
On the other side of the equation, trade wars or even the fear of them, can and have had a negative impact on domestic stocks, especially multinational companies, says Milan.
“Additionally, it has created negative headwinds on international stocks in both Europe and some emerging markets, like China, and has contributed to the appearance of a global growth economic slowdown, which can put downward pressure on international equities,” Milan notes.
Still, optimism that trade talks between the U.S. and China will end with a deal the market will like has provided an added boost to stock prices so far in 2019.
What to do if the market heads south again
If your portfolio takes a temporary pounding from volatile markets sometime in 2019, don’t panic. Instead, stay focused on your long-term investment strategy.
“Even if you lose real money, even three percent of your portfolio, you’re still better off holding on to your portfolio holdings,” says Radjabli. “It’s virtually impossible for market professionals, let alone individual investors, to predict the top of the market before a recession or market downturn.”
At Apis Capital, Radjabli uses machine learning to provide useful market insight to help determine whether future volatility expectations are rising or falling. The average investors doesn’t have those tools, but that’s okay, he says.
“Although we have been successful in anticipating large volatility moves like August 24, 2015, and February 5th, 2018, in each of those cases an investor would have been effectively fine holding through those until the market recovered,” Radjabli notes. “That’s because there was very little systemic and fundamental reasons for those falls.”
Rather than focus on how big their paper losses are in a market downturn, investors should pay careful attention to real indicators of a recession and market trends.
“If and when a bear market starts to materialize, it will become very obvious in terms of poor economic data, as well as consistent and continuous downward trends in the market,” Radjabli says. “That’s when an investor can benefit from going to cash, going to defensive stocks or protecting their positions.”
“Until then, if they are selling every time the market drops 3 percent, they are likely to keep selling at small dips and miss out on the larger upward trend,” he adds.
Sectors that look promising in 2019
The stock market is driven by many factors, and depending on how the underlying economy is doing, some investment sectors are more promising than others at any given time.
That goes double when an investor is trying to avoid market volatility. In periods when market swings are dramatic and fear is on the rise, low-volatility investments can be found in historically low-volatility sectors.
“Industries that are typically less volatile are consumer staples,” says Marcus Crawshaw, a financial advisor at William Allan, LLC, referring to companies that sell toilet tissue, toothpaste, turkey and other daily staples. “People need these products to live their lives, insulating them, to some degree, from huge market swings.”
If the volatility is a result of real economic issues, consumer staple companies’ earnings will likely hold up better than other sectors of the market. “In addition, as many investors chased high-flying tech stocks for the past five years, these boring consumer staples have been depressed and may get a boost from more investors seeking returns in a calmer environment,” Crawshaw states.
When you start looking at consumer staples, focus on stocks and funds that include food, beverages, tobacco and household items, Kroeger advises.
“These are the staple products of our homes and daily needs,” he says. “No matter the economic condition, people will continue to buy these products. In addition, fast food and medical products will be recession-proof industries going forward.”
Kroeger also likes medical technology companies right now. “Companies that operate in this sector that have near breakthrough technology and outstanding track records of operational performance have a high likelihood to weather any recessionary or volatile environment,” he says.
[READ: 11 best investments in 2019]
The bottom line on dealing with market volatility
If there’s a single unifying theme that stock market experts tout when facing volatile markets, it’s don’t panic.
“Investors need to be able to put up with some volatility,” says Lyn Alden, founder of Lyn Alden Investment Strategy. “Stocks (deliver) better returns than bonds over long periods of time.”
The majority of investors shouldn’t worry too much about what happens quarter-by-quarter, Alden adds.
“Instead, the real concern is how to avoid large crashes or permanent destruction of capital that takes many years to recover from,” she says.
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