In the last week or so, stock markets have seen significant volatility, or change, and it has folks worried. Stocks dropped about 6% early in the week. Does a bad week make Chicken Little correct, maybe people wonder.
The chart above is a great illustration for times such as these. It was provided to me by Wespath Investment Management, our investment partner, based on data from Morningstar, a firm that does research in this area. You can see a full-sized version of the chart here.
The blue bar for each year shows the annual change in the S&P 500, which tracks 500 of the largest domestic stocks. For 2017 it shows an increase of 21.8% and in 2016 an increase of 12%.
But then look at the gold triangle for each year. This compares the largest drawdown, the highest peak to the lowest point, of the S&P 500 during the year. In 2017, the largest decline was just 2.6%, compared to 2016 when the index declined 10.3%.
I think it’s extraordinary that in a year of such significant growth as we saw last year, that the downside volatility was so low, in fact the lowest in 20 years or more.
And when you compare the 6% or so that we saw the market drop this week to previous years, we are well within reasonable ranges. The average for those 22 years is an intra-year decline of 15%. Further, among the years that the Average finished on the positive side the intra-year decline is still more than 11%.
Please do not take this as a promise that the we will not see another drop this year or even that the drop will be significant. These are the realities of investing.
But I am saying to you that volatility is a very natural part of the investment process, one that lulled us to sleep last year only to wake us up with enthusiasm within the last week.