March Madness: Preparing for the Market Volatility Ahead
March 2, 2020
By Ted Hanson
It is officially March, and college basketball fans are already looking ahead to completing a bracket for this year’s tournament — which is titled “March Madness” for a reason. Athletes will experience unforgettable moments, from Cinderella stories to heartbreaks. Viewers from around the country will tune in, knowing that anything can happen.
Much like the volatility basketball fans will see this March, a type of “Market Madness” has consumed investors so far this year.
Within the first two months of 2020, we've experienced a phase one trade deal, all-time highs in the market, the start of presidential caucuses, increased turmoil in the Middle East and a Coronavirus outbreak. Taking into account that markets generally have a “fear of the unknown,” it's not entirely surprising that we've seen an increase in volatility.
Going forward, should we expect more volatility? The short answer is yes, especially in the long term. The chart below provides a visualization of why:
This past decade we’ve experienced our own set of heartbreaks and Cinderella stories. We saw the longest bull market in history and unemployment near the all-time low; but we also experienced government shutdowns, trade wars and a variety of other events. Nevertheless, the S&P 500 experienced high returns with unusually low volatility, especially compared to the decade before. The past 10 years have been very kind to investors, many of whom have grown accustomed to the predictability.
What does that say about long-term expectations? It is likely that the markets will revert to the mean. Expectations are the S&P 500 will see lower returns and higher volatility than the previous decade. It is impossible to predict the headlines during the next 10 years, but we do know we can expect the markets to react to the news (good or bad). Those reactions are normal and expected. In fact, the market experiences a correction every 12-18 months on average. These corrections are often triggered by random news or events, rather than a decline in economic growth.
All that said, times like these are a vivid reminder of the importance of having the appropriate asset allocation, knowing your risk tolerance and staying diversified. We are coming out of one of the best decades we've ever seen in terms of high returns and low risk, and those types of results can lull investors into taking on more risk than they should.
While the markets are sure to provide madness and fireworks, don’t underestimate the comfort a well-diversified portfolio can bring. If you would like to discuss your portfolio, contact an advisor today!