Monday was a challenging day for the markets, as we saw sharp declines of 2% in U.S. large-cap stocks.1 The rout was fueled by declines in technology stocks, with mainstay names like Apple, Nvidia and Advanced Micro Devices declining by 5% or more. This year, it seems like we have experienced heightened market volatility — October was a painful example, with several days of sharp market declines that wiped out the gains we reaped earlier in the year.
Some of this volatility certainly may be attributed to the recent midterm election — data shows that market volatility can go up during election years. But you may still be wondering if this level of volatility is “normal.”
What Is “Normal” Market Volatility?
In fact, on average, markets historically have pulled back by 5% three times in any given year. Going back to 1980, the S&P 500 has had an average intra-year decline of 13.8% from peak-trough — but the market finished with a positive return in 29 out of those 38 years. There can be some years when the market is abnormally calm, like we experienced in 2017. In that year, the peak-to-trough decline was just 3% — the smallest intra-year pullback since 1995.
U.S. Market Intra-Year Gains and Declines vs. Calendar-Year Returns2
Accepting Volatility in Investing
As hard as it can be to embrace market volatility, sharp swings on the upside and downside are a normal part of investing. One of the most important investment principles to remember is that risk and return are related. What does that mean, exactly? If stock markets offered investors a smooth ride all the time, then there would be no risk and everyone would rush to invest in equities, thereby limiting the potential returns you could gain.
When we look back at history, it’s clear that investors who have been able to weather the ups and downs of the market have been rewarded for their discipline.
Capital Markets Have Rewarded Long-Term Investor3
Monthly growth of wealth ($1), 1926−2017