Stocktake: Volatility may lie ahead but that’s normal

‘Always expecting the market to collapse is a loss-making strategy’

The Dow Jones Industrial Average suffered its worst day since October on Monday last week only to recover almost all of its losses the following day. Photograph: Michael Nagle/Bloomberg

The Dow Jones Industrial Average suffered its worst day since October on Monday last week only to recover almost all of its losses the following day. Photograph: Michael Nagle/Bloomberg

 

Markets have been jittery recently. And they may yet get more jittery, but investors ought to remember there’s nothing abnormal about market volatility.

The Dow Jones Industrial Average suffered its worst day since October on Monday last week only to recover almost all of its losses the following day. Bulls will hope any pullback will be a short-lived affair, but it would be prudent to assume more nervy days lie ahead.

In an average year, the S&P 500 endures about three separate 5 per cent pullbacks, notes LPL Research’s Ryan Detrick. There hasn’t been one since September 2020 – “a long time without a normal pullback”, he cautions.

Apocalyptic commentary

Former Robeco strategist Jeroen Blokland makes the same point. History tells us it’s unlikely that 4 per cent will be the biggest decline we will see in 2021, says Blokland, who notes the median intra-year maximum drawdown since 1980 is 11 per cent. Of those 40 years, only two (1995, 2017) saw maximum declines below 2021’s.

Doubtless, any such selloff will generate the apocalyptic commentary so often seen during nervy markets, but volatility is part of the investing process. As Blokland notes: “Being an ultra bear, always expecting the market to collapse, is a loss-making strategy.”

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