Editor's note: Volatility is one of investors' greatest concerns in the markets. But according to Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – it's also one of the most recurring fears. In this essay, published yesterday morning in the free Chaikin PowerFeed daily e-letter, Marc debunks volatility concerns... and shows how investors can profit in the market even in times of uncertainty.
I see this happen just about every time the market makes a big move...
In fact, I've seen this pattern repeatedly since 1966. I was just starting on Wall Street as a broker at Shearson, Hammill. And even though we hadn't yet landed on the moon... a lot of things about humanity and the markets still remain the same today.
When things change, you see the fear come out. And you see the speculation. That's just as true in the markets as with humanity in general.
If the markets have been on a big run higher and things start changing, people start asking questions like...
"Is this the end of the bull market?" "Is the Federal Reserve about to tip the economy over?" "Has the U.S. consumer finally run out of steam?"
It's a constant cycle of worst-case scenarios and fear. It happens every year.
But the reality is, market volatility is predictable. It's just that it probably isn't predictable in the way you want it to be.
As I'll explain today, broad market volatility isn't just a regular occurrence. It's the regular occurrence...
Think back over the past decade. There's not a single year that hasn't been plagued by a swirl of crash warnings in the media. Take a look...
When you stop to think about it, it makes sense. As I've said time and time again, pullbacks happen – even in a bull market. So of course we see a 5% or worse drawdown just about every year. Markets rise and fall.
And looking closer at the chart, we see that we can expect a 10% or greater drawdown in a given year more than half of the time. That means so-called market "corrections" are hugely common.
But we need to be honest with ourselves. These incredibly common events often feel like a big deal when they're happening.
As you know, the markets have been volatile since the end of July. The broad market S&P 500 Index hit an all-time high on July 16. Then it started to slide. The next week, on July 24, the index suffered a big single-day drop of 2.3%.
As you likely remember, the media was all over it. NBC News said that day...
Signs of a broader economic pullback continue to mount: The U.S. unemployment rate is rising, excess savings from the pandemic have been exhausted, and consumer borrowing stress is at fresh highs.
And in early August, the markets took another big hit. On August 5, the S&P 500 fell about 3%.
Those are two big moves in less than a month... But the volatility looks pretty run-of-the-mill on a five-year chart. Take a look...
The recent zigs and zags simply don't look all that different from the ones of the past few years. And when you look at this year specifically, there's no question it has been a big one.
Despite the volatility, the S&P 500 is up about 20% in 2024. And since those deeper lows last month, it has climbed nearly 10%.
Folks, the point is simple...
Volatility is normal.
It's part of how the markets work.
And finding success in the markets depends on you avoiding the noise – and the emotions – when volatility stirs up.
So don't let the volatility fool you. It's normal in up years. And it's normal in down years.
The trick is looking past it to see where the market is really headed.
Good investing,
Marc Chaikin
Editor's note: In the wake of the Federal Reserve's interest-rate cut, Marc just went on camera to share a critical warning. A signal is flashing now that has flashed before every big crash of the past two decades. But the entire market won't suffer...
Marc has created a tool to help the average investor figure out which sectors will outperform once this shift begins. So if you want to understand what's really happening to the market's fundamentals – and protect your wealth before the end of the year – make sure you hear the details... Click here to watch his presentation.
Further Reading
"You might think you're diversified if you hold a combination of stocks and bonds," Vic Lederman says. "But in reality, most investors are often still too exposed to one currency." And right now, that currency is weakening – which means it's a good time to look for opportunities in other corners of the market... Read more here.
"The 'easy ride' might be over for now," Brett Eversole writes. "But if you got out of the market in July, don't make matters worse by repeating that mistake." The most volatile of the major U.S. indexes isn't done rising. According to history, after its quick rebound last month, the largest gains are likely still in front of us... Learn more here.
