Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Market Volatility: A Friend or Fright?
Published Date : October 27, 2014
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” – Warren Buffett
With Halloween fast approaching, it appears the stock market has decided to let one of its seemingly long lost goblins out of the closet – volatility. While most of us would prefer to see the market move in a predictable way, year after year, this simply isn’t a reality, and also presents a unique element of risk. Human emotions play into market movements and a complacent market typically leads to excessive risk-taking. Janet Yellen recently expressed concern over this very issue following the buoyant market action of 2013. Volatility can be a healthy development that creates lasting opportunity for investors who have to fortitude to take a step back and fundamentally examine economic and market conditions, without being “spooked,” and realize the opportunities being presented to them.
The primary factor at the root of excess volatility is uncertainty, or the fear of what “ghosts” might be lurking around the next corner. Looking back at recent history, cycles of uncertainty can be painfully long and typically last several years. While it is no surprise that market volatility was high in 2008 and 2009, economic uncertainty, and therefore volatility, continued all the way through 2011. It was only in the last two years that economic conditions in the U.S. began to solidify and the market regained a relative sense of calm. In fact, during 2013, the market only fluctuated 2% or more on four days compared to 35 days in 2011. While this environment was pleasant, it didn’t create a lot of compelling buying opportunities as calm conditions led the market to march slowly higher at a rate that outpaced earnings growth.
It has been almost three years since the S&P 500 experienced a 10% market correction and, during that time, we have witnessed a number of negative events domestically and internationally which included political turmoil, a rising interest rate environment, a significant negative GDP quarter during the first quarter of 2014 and a rising number of geopolitical events. While plentiful, none of these events were “scary” enough to cast doubt on the global growth outlook and therefore, never resulted in more than a 5% market correction. So, what caused the recent abrupt change in market sentiment and volatility? It is hard to pinpoint exactly one event that led to the recent change in the market’s perception of perceived risk, rather it appears to be a culmination of events. News of economic slowing in Europe and Japan combined with uncertainty surrounding the end of the quantitative easing and its potential impact on growth in the U.S. have all contributed to a sense of doubt. While it will be several months or quarters before we know exactly how these factors will ultimately impact the global economy, our view of the U.S. economy remains sanguine and central banks around the world continue to be supportive of slowing economies, much like the U.S. Federal Reserve has been for the last six years.
While market volatility can be unsettling, these “frights” can create tremendous opportunity and contribute to a healthy market environment where risk taking is more contained. At Sand Hill Global Advisors, we continue to actively monitor the global growth environment and plan to take advantage of opportunities as they arise. As valuation becomes more attractive, today’s volatility has historically provided for tomorrow’s good fortune.
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