Stock market volatility seems to be a growing feature of the world in which we live. Some seem to thrive on it; others recoil. Should you invest in or divest equities? This blog considers global stock market volatility and poses 6 vital questions that all should consider:
- Just how volatile are markets right now, at the end of 2019?
- Is volatility a normal feature of these markets?
- How important is confidence as a determinant of volatility?
- Should investors react to long term trends or short-term volatility?
- Are there any specific factors affecting UK equities?
- What should investors do in times of stock market volatility?
This is rather a lot for a single blog, so I’m going to split it into two parts. I’ll address the first three questions in this article, and the others next month.
When asked what’s most likely to blow governments off course, Harold MacMillan reputedly said, ’Events, dear boy, events’. While the quote may be disputed, the sentiment is not. And it applies equally to global stock market volatility, too. Before we look at the causes of volatility, let’s consider how variable those markets are right now.
Is Stock Market Volatility Worse Than Ever, Right Now?
When looking at stock market performance, a lot of commentators seem to equate volatility with a downturn in value. That’s not necessarily the case, of course. Volatile markets show rapid changes in value over a relatively short term and heavy trading. Investopedia have a good definition, if you want to get technical.
The data shows that when we take a long-term view, in fact volatility is no more or less than you’d expect. Take Morgan Stanley’s MSCI Global Index (large corporates, 23 developed nations). Since 2004 it’s shown a generally upward trend, notwithstanding 2008.
This is an updated version of the chart I used in my March 2019 blog, ‘Why Long Term is Best’.
Yet when we look at the daily news feeds, we seem to see a different picture. Take the Dow jones in the USA. Earlier in 2019 it was hitting record highs. Then on 14th August it dropped 800 points. These broad swings were largely attributed to the release of news stories. News about trade and tariff wars between the USA and China. News about slowing of the German and Chinese economies. News of Brexit uncertainty. Quite often, the shock of a news story creates a large movement in prices, which are then softened over time as they’re put into context. But it’s the big movement that’s newsworthy. That’s what we see. Professional investors learn to filter these volatile actions and reactions.
Are Stock Markets Normally Volatile?
In short, yes. Markets are always, to some extent volatile. Average monthly volatility is measured as being 19% when US S&P data from 1928 to 2019 is aggregated (see below). And the months September, October and November are typically more volatile than others.
Again, when we take a shorter-term view, the last couple of years do seem to be more volatile than historical trends. The reason for this isn’t because we’re suddenly in new, uncharted territory (although it may feel that way). Of course, an 800-point movement in a day was worth a lot more 20 years ago than it is now. The difference between now and the past is simply that the magnitude of the swings in absolute numbers are larger than they have ever been before. In percentage terms, it’s pretty much the same. Stock market volatility isn’t uncommon.
Volatility is a stock market’s natural mechanism for keeping equity in the hands of long-term investors. History has shown that investors who shrug off short-term stock market volatility in favour of a long-term investment commitment are better rewarded.
How Important is Confidence in Stock Market Volatility?
Market confidence, as we’ve seen, can be fragile on a day-to-day basis. The way the news is fed to us nowadays on a 24/7 basis means that short term volatility is probably here to stay. As politicians in many parts of the world seem to thrive on discord, it only fuels the fire.
The extent to which a presidential tweet can derail your pension planning is matter for you, of course. My advice is always to take a long-term view and to focus on your needs and reasons for investing in the first place. Globally, investors have shown a strong level of long-term market confidence, even through the recession post-2008.
In conclusion, that’s probably a good place to leave part I of this look at global stock market volatility. I’ll conclude it next month.