I again am hearing the chatter among small investors that markets are plunging. We are back in the much-dreaded mass media fascination and focus on every down day in the market. It drives me crazy as the talking heads describe with urgency the latest 300-point drop in the Dow, usually without any perspective other than an overemphasis on the size of the point drop. As a value investor, I am wired to be skeptical of almost everything, including valuations, and certainly don't believe markets are undervalued at this point. However, perspective is important lest we fall back into panic mode.
Year to date, the S&P 500 is down about 8.5%, so not a great start to the year. In the 16 trading days so far in 2022, there have been six "volatile" days as measured by moves up or down of more than 1% in that index (that's my homegrown measure of volatility, as simplistic as it may seem). All six of those days have been negative. However, none have been more than 2%. I am not saying we won't get there, but this run of volatility has been fairly mild, so far, anyway.
Less than two years ago, from Feb. 21 to May 1, 2000, at the outset of the pandemic, we had a truly volatile run. During the 50 trading days within that period, 42 of them were volatile. Sixteen times during that stretch the S&P 500 rose or fell at least 4%, including four days it rose or fell at least 9%. How quickly we forget.
Then there's the fourth quarter of 2008, which I believe to be the most volatile period in market history. During that period, the S&P 500 closed plus or minus at least 1% on 50 out of the 64 trading days, or four out of every five sessions. Amazingly, we experienced 16 days when the index moved plus or minus 5%, a remarkable feat considering that in the 57-year period from 1950 to 2007 there were 19 such moves.
Yes, there are storm clouds on the horizon. Inflation has reared its ugly head, and where it stops nobody knows. The Fed is on the cusp of raising interest rates. I still think there will be four moves of 25 basis points this year, though it was not that long ago that many believed there would be no moves until 2023. There are plenty of reasons to be cautious, some of which the markets may be pricing in, but this is not the time to panic. It is the time for investors to review their allocations and make sure they are appropriate for their own personal circumstances and not what the popular "rules of thumb" dictate.
Some dry powder is always good, too.
