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Volatility Picks Up
What do weather and investing have in common?
From 1991 to 2020, the average temperature of the United States was 54.7° Fahrenheit. Of course, that doesn’t mean the temperature in every state on every day was 54.7°F. The weather varied dramatically from place to place and month to month.
The same is true of investment averages. At the end of February, the average annual total return* for the Standard & Poor’s (S&P) 500 Index over the past 10 years was 12.98 percent. That doesn’t mean the S&P 500 returned 12.98 percent every year – it didn’t. The index’s total return varied dramatically from year to year.
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The stock market doesn’t provide level returns. In some years returns are positive, and in other years returns are negative. After two years, of stellar returns from U.S. stocks, the market has been experiencing a pull back.
Last week, U.S. financial markets were volatile. “A roller-coaster week for markets ended on that same note, with stocks whipsawing as traders tried to make sense of a myriad of headlines around the economy, tariffs and geopolitical developments. Just minutes after a slide that drove the S&P 500 down over 1 [percent], the gauge staged an ‘oversold bounce’ as Federal Reserve Chair Jerome Powell said the economy is fine. The Nasdaq 100 briefly breached the threshold of a correction. Bonds fell,” reported Rita Nazareth of Bloomberg.
In contrast, some European stock markets moved higher last week. “President Donald Trump’s drive to shake up the world order is creating some surprising winners. As the U.S. stock market reels from tariff fears, German stocks are surging because the government has committed to almost $1 trillion in new spending on infrastructure and defense…The sea change in policy is creating a giddy optimism in German markets not seen in decades,” reported Brian Swint of Barron’s.
The divergence in performance brings home the value of a diversified portfolio.
When markets are volatile, remain confident and resist the impulse to react to short-term performance. The assets in your portfolio were carefully chosen to help you reach your financial goals. Unless your goals and risk tolerance have changed, your asset allocation shouldn’t. The weight of evidence accumulated over previous decades supports the idea that staying the course – holding a well-allocated and diversified portfolio and rebalancing periodically – is a sound way to pursue long-term financial goals.
Last week, major U.S. stock indices finished the week lower despite a rebound on Friday. U.S. Treasury yields were mixed last week with yields for shorter maturities dropping while yields on longer maturities rose.
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Market volatility has really picked up among concerns not only regarding tariffs, but also about mixed economic signals like weak consumer confidence, hotter inflation, government worker layoffs, and more. These are the times investors often start wondering if there is something they should do or change. This consideration is a normal human reaction to make us feel more in control. However, there is an abundance of data that shows the best thing to do with regards to your investments is to stay the course.
Quite often the best days in the market occur after some of the harder days just occurred. The hard days are also when our thoughts tend to shift towards wanting to make a change. Thus, reacting can increase your chances of missing those days. The following chart shows that, over the past 25 years, holding on after pullbacks was superior to getting out of the market, even for brief periods. While past performance is no guarantee of future results, the fact that investor sentiment can shift so quickly is why those who are able to stay disciplined are often rewarded.
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We have been through plenty of volatility especially over the last five years. As we write today’s newsletter, the S&P 500 is down over 2%. It is important to keep in mind that this is not unusual. The following graph shows the number of days each year that the S&P 500 lost 2% or more. | |
It is of course easy to look at data. It is more difficult to live through data. We are here if you would like to discuss your allocation or long-term financial projections. We are closely monitoring our positions and are happy to discuss your thoughts or concerns. | |
The Spotlight Was on the Real Federal Reserve of Atlanta | |
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You may have seen a headline or two about GDPNow last week. It’s the Atlanta Federal Reserve (Fed)’s unofficial economic growth forecasting model – and it’s been delivering twists and turns worthy of a reality TV show.
GDP, or gross domestic product, is the value of all goods and services produced in the United States. “The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing. The United States' GDP is also watched around the world as an economic barometer,” reported the Bureau of Economic Analysis.
At the end of January, the Atlanta Fed’s GDPNow model estimated the United States economy would expand by 2.9 percent in the first quarter of 2025. Since then, the estimate has moved sharply lower. Last week, GDPNow projected the U.S. economy will shrink in the first quarter, contracting by 2.4 percent.
It’s a remarkable swing that captured a lot of media attention.
How should investors weigh this bit of unofficial data? Probably not too heavily because GDPNow can be volatile. “These estimates are published regularly as new economic data is released…There were 11 [releases] in February alone. Friday's [February 28’s] shock reading of -1.5% was led by a record-high $153 billion trade deficit in January, most likely as firms front-loaded imports ahead of tariffs, and Monday's decline was driven by soft manufacturing activity. There's every chance -2.8% turns into a positive reading in a few weeks,” reported Jamie McGeever of Reuters.
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Other Federal Reserve Banks also have economic growth forecasts. These models also have been moving lower, but they haven’t shot into negative territory like GDPNow. The New York Nowcast dropped from an estimated 2.94 to an estimated 2.67 percent for the first quarter, and the Dallas Fed’s Weekly Economic Index moved from 2.4 percent to 2.2 percent.
The average absolute error of final GDPNow forecasts is 0.77 percentage points. The final forecast is expected in April.
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AJ Advisors
www.ajadvice.com
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Phone: (615) 709-8709
Fax: (615) 505-3306
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John Stauffer, CFP®
Partner
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Andrew Quinn, CFP®
Partner
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Past performance does not guarantee future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, strategy, or product (including those recommended or undertaken by AJ Advisors, LLC), or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any indicated historical performance level(s), be suitable for your portfolio or individual circumstances, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to their individual situation, they are encouraged to consult with the professional adviser of their choosing. AJ Advisors, LLC is neither a law firm nor a certified public accounting firm and no portion of the content herein should be construed as legal or accounting advice. If you are an AJ Advisors, LLC client, please remember to contact the firm, in writing, if there are any changes in your financial situation or investment objectives or if you wish to impose, add, or modify any reasonable restrictions on our investment advisory services. Until so notified, AJ Advisors, LLC will continue to rely on the most recent information provided. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available upon request. | | | | |
