How to cope with market volatility
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This article was written by John Waggoner, a freelance columnist for the Morningstar US website. The views expressed in this article do not necessarily reflect the views of Morningstar. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
If you start to whimper just a little bit before you read the market news, it's probably because stocks are more volatile now than they have been since 2011, when oil prices soared and US debt got downgraded.
Volatility, of course, is really a euphemism for "scary down days, often in succession". No one complains about a market with wild and crazy gains. But heightened volatility can not only wrack your nerves, it can make you do silly things with your money.
It's no wonder the market feels so volatile. It is. Let's start by looking at the magnitude of recent market volatility. One measure is the CBOE's VIX index, sometimes called the "fear index". The index measures the expected movement of the S&P 500 in the next 30 days. It's a weighted blend of the price changes on options in the S&P 500.
In August, the VIX spiked to 28.3, its highest level since 2011. Recently, it has levelled off to 24.8, which is still historically high. Another way of looking at volatility: The S&P 500 has risen an average of 0.02 per cent a day since the start of 2000. Since August, it has fallen an average of 0.21 per cent a day.
What's behind the volatility?
Worries about China's economy are a factor. In October, the Chicago Purchasing Managers Index plunged to recessionary levels, with 30 per cent of those polled saying that China's economic woes had a greater effect on them than Europe's problems. The PMI is a monthly poll of purchasing managers and is widely used as a leading economic indicator.
Another worry is the Federal Reserve, which may raise interest rates later this year. While the increase in the fed-funds rate would be small--just 0.25 per cent, most likely--it could push the value of the US dollar higher and put increased pressure on emerging-markets economies.
And then there are earnings. Markets get particularly jittery as big, bellwether companies report, and they sell off if there are big disappointments. Finally, Congress will have another rendezvous with a US government shutdown on 11 December, when the most recent continuing resolution for 2016 will run out of money; the federal budget year ends 1 October.
But before you decide to sell all your stocks or make any portfolio adjustment based on recent volatility, ask yourself these three questions.