Investing is counterintuitive. You try to buy when prices are low, which makes good intuitive sense. But then you're supposed to hold while others are selling, which doesn't feel very good. You're also supposed to ignore, or at least not fall prey to, hyperbolic news headlines when prices are down. This can be hard too, especially when headlines start getting interesting. And yesterday, when the Dow was briefly down 1,600 points and the media nearly went berserk, it's just plain hard.
Making this even more challenging, the closer you pay attention the more you see the odd way markets react to news and economic data. So odd, in fact, that markets can react differently to the same type of news depending on the general outlook and sentiment of the day. Good can be bad, up can mean down, and, if you're not careful, confusion can reign supreme.
Take the current market decline as an example. Economic reports came out last week showing how our economy is continuing to expand and the growth trend is largely positive. Intuitively, you think great, economic growth is a good thing, is better than the alternative, so stocks should keep moving up, right? Well, this is where the counter intuitive nature, and even manic tendencies, of the stock market comes into play.
The market likes growth so long as is doesn't come with inflation and short-term interest rate increases by the Fed. Since all three ultimately go together, what the market really doesn't like is not knowing how much of each will be present and when. The market had become complacent about this and is now waking up and repricing itself accordingly. The bond market did so quickly because it had less distance to travel. During yesterday's decline sellers of stocks finally started buying bonds, which helped bond prices turn positive. Stocks, on the other hand, had run up so much lately they had farther to fall.
The Dow experienced its largest one-day point decline yesterday, finishing down 1,175 points. The S&P 500 also had a bad day. Remember, however, that both indexes are tallied in points, but the percentage moves are what's important. All told, yesterday the Dow was down 4.6% and the S&P was down 4.1%. Bonds were up 0.4%. What else was up? The VIX, a gauge of volatility and investor "fear", was up over 100% on the day.
Lots of volatility, over a year's worth, crammed into about a week. Ouch. If your head is spinning a bit, then you're not alone. Fast and furious seems to be the way of the markets these days, both on the upside and the downside. While the speed of markets can be disconcerting, it's nothing to worry too much about as ultimately this speed provides more liquidity and pricing transparency.
As markets reprice themselves there will be more volatility. Historically, the stock market stays volatile for at least a couple of weeks after a sharp decline. So, try not to panic and remind yourself that investing is a long-term business, market declines are normal, and can and do happen within a continued bull market.
Along these lines, the following short article from Bob Veres, a planning and investment industry guru, sets the right tone. It's a reminder that one of the worst things we can be while investing is an alarmist. The article was written last weekend referencing last Friday, before yesterday's decline, but is only more important now.