- Market volatility has calmed a bit after reaching record levels in 2008.
- The climb since the March 9th stock market low has been steady— US stocks gained ground in 21 of the past 29 weeks and in every month since February.
- But investors shouldn't forget pullbacks and corrections are normal parts of any bull market.
- Brief downturns during larger market uptrends are normal, not abnormal, and no reason to abandon this still nascent stock market rally.
Normal stock market movements seem a far-off memory to many after the past year's turmoil. As the market plunged last fall, the CBOE Volatility Index—a measure of stock market volatility better known as the "VIX"—reached an all-time high since its inception in 1993 and remained elevated into this year. But since the March 9th stock market bottom, the VIX has crept lower as stocks have marched higher. This steady climb has resulted in the S&P 500 rising nearly 60% off the bottom—highly encouraging, but investors shouldn't forget pullbacks are normal parts of any market. Stock market corrections can be sharp, steep, and scary, but they're usually short-lived and over time appear as nothing little more than blips in the larger market trend. As such, it's foolish for investors to jump in and out of the market to try to avoid them.
Although the S&P 500 fell this week, stocks gained ground in 21 of the past 29 weeks and in every month since February. So far in September—a month many feared cursed—US stocks are up 2.5%. Unless stocks drop in the first few days of next week, September will continue the positive streak. But even steadily rising markets include volatility.
A look at the bull market from October 2002 through October 2007 provides historical perspective. Stock prices doubled over that period, but market volatility was exceptionally low. In fact, the VIX hit a near all-time low in early 2007. Yet there were a number of market pullbacks during even that period of slow-and-steady gains. US stocks experienced intra-year drops of 4.6% in 2003, 8.0% in 2004, 7.2% and 5.5% in 2005, 7.7% in 2006, and 5.7% in 2007 before the October peak. Just this year from June 2nd to July 8th, global stocks pulled back nearly 8% before continuing their upward climb, rising 22% since.
Today, many investors seem certain the "V" market pattern that has been unfolding can't persist. But the concerns cited by most skeptics—inflation, deficits, debt, etc.—are widely known and already reflected in stock prices. The stock market has a long way to go just to get back to pre-panic levels. And there's no reason for stocks to stop there. The market move so far reflects the acknowledgement the global economy won't be tumbling down a cliff for the foreseeable future as many expected just months ago.
It's highly likely we'll look back on this summer as the nadir of this economic downturn. As economic growth resumes, the stock market recovery is likely to continue. Will we see pullbacks and corrections along the way? Absolutely. But that's normal, not abnormal, and no reason to abandon this still nascent stock market rally.