It’s Up! No, It’s Down! What to Make of Market Volatility.
The S&P 500 was up about 3% last week. The growthier and tech-heavy NASDAQ did a little better, returning just over 4%. Good news, right?
Before getting too excited, we think investors should consider how stocks behaved in the two previous prolonged bear markets. And, specifically pay attention to the types of companies that dominated headlines, those at the center of the controversary.
Nearly 15 years ago, banks were among the hardest hit during the global financial crisis.
Between the beginning of 2008 and the market’s March 2009 low, JP Morgan, Bank of American, Morgan Stanley, Wells Fargo, and Citigroup each had AT LEAST sixteen days where the stock price rose 10% or more, in a single day! What about smaller moves, say 3% price jumps like those from last week? For each of these five businesses, a single day jump of at least 3% happened at least 68 times during that period.
And yet these stocks went on to make new lows nearly each time[1]. In fact, those stocks fell between 62% and 96% from 2008 through March 9, 2009.
What about the tech bubble from the early 2000s? Did technology stocks behave differently when they were in the eye of the storm?
Between the April 2000 and October 2002 lows, Oracle, Amazon.com, Cisco Systems and Intel each had at least 98 days in which their prices jumped 3% or more!
And each stock lost over 76% of their value during that bear market.
Recently, high growth companies, many of which had little to no profit but offered the hope for big future earnings, have experienced pain. Certain COVID-19 beneficiaries saw business boom during the pandemic. Unfortunately for many of them, it may have been temporary.
For example, companies like Roku, Peloton, Wayfair, Carvana, and Zoom Video[2] all thrived during the early stages of the pandemic. More recently, each stock had at least 62 days between April 2021 and September 13, 2022, where their prices rose by 3% or more. And each stock is down at least 75% during that period.
The chart below illustrates these examples. The orange dots represent the number of days each company’s share price rose at least 3% during the time frames listed. The shaded bars show the returns for each stock during the same time frames.
When uncertainty is driving the bus, volatility likes to ride shotgun. Uncertainty was high in 2000 and 2008, just as it is now.
We highlighted the big up days, but there were plenty of big down days during these periods as well. The bigger point we would make has to do with emotions and behavior.
In times like this, it is easy to get excited and hopeful on the up days. “Hey, stocks are up quite a bit! Things must be getting better. I should get some money back in the market.”
It is just as easy to get sad on the rough days. “Never mind. The market is down a lot today. Maybe we should get more conservative.” Or something like that. I suspect you get the idea.
What will the Fed do over the course of the next 6-12 months? Will energy prices go higher or lower? How will the invasion of Ukraine evolve? Will unemployment rates remain low or are bigger layoffs coming? And the ultimate question: how will investors react to all this information, real-time?
These questions are difficult to answer correctly in advance. Having a plan can help remove some of the emotion that often comes with periods of volatility.
Find this interesting? Reach out to the DIVVI team to continue the conversation.
[1] Morgan Stanley hit its low on 11/20/2008. Citigroup, Bank of America, JP Morgan, and Wells Fargo each bottomed between 3/5/2009 and 3/9/2009.
[2] We are not expressing an opinion on any of the companies listed. They were chosen as examples that we believe fit (or previously fit) the ‘high growth’ profile mentioned.
Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
