After the bear market reached a low in early 2009, stocks rebounded with a vengeance, surging ahead with few downturns of note along the way. Propelled by central bank actions, partly justified by rebounding corporate profits, a return of “animal spirits” sent the markets to their current, rather pricey conditions, relative to earnings, sales or book value.
Priced for perfection, stocks may be vulnerable to any number of factors, whether geopolitics, a reversal or tapering of central bank support (including not just that of the U.S. Federal Reserve, but also the European Central Bank), or the failure of corporate profits to follow lofty trajectories. Or it could be just as simple as investors becoming more conscious of risks they take and the prices they pay for stocks.
Regardless, whether the market takes a sharp tumble or merely trudges along, volatility may well return to more-normal levels. It’s true: markets have been unusually calm, and there’s reason to believe we should not expect that to continue.
What should we expect instead? We answer these questions and more in our recent commentary, “Expectations, Volatility, and Eventual Downturns”. Or, we could put a different way, “Setting Realistic Expectations for the Market”. Either way you title it, the conclusion is the same, as you may explore in that piece.
Your next logical question may be, “So, if a market downturn is coming, or at least more volatility, what should I do?” To answer that question, please refer to our second piece, “What to Do in Times of Market Volatility.”While nobody can accurately (and consistently) predict market movements, there are ways you can prepare for volatility ahead.
However, rather than timing the markets, whether it’s this downturn or another, many of these items are not limited to battening down the hatches for a hurricane. They’re simply action items that apply to many market environments, and include the (often-neglected) basics of routine portfolio maintenance.
We need not include the reminder that markets don’t go straight up. After all, investors are compensated for risks they undertake. But since it has been such a long time that we’ve had any real risks surface in the market, now is a good chance to reacquaint yourself with what might be normal levels of volatility. And yes, sharp market corrections are indeed very normal, and they are, or at they once were, very common. As you read our more detailed commentary in the links above, you’ll find out why we might face more volatility in the current environment. The bottom line is that adopting realistic expectations might simply be the most important takeaway.
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