The latest JOLTS (Job Openings and Labor Turnover Survey) report was released on Tuesday. In January, there were a better-than-expected 7.74 million job openings, keeping the ratio of openings to available workers at a healthy 1.1 to 1.
Wednesday and Thursday saw the release of Consumer Price Index (CPI) and Producer Price Index (PPI) reports for February, and both were lower than consensus estimates.
The Fed meets next week, with the market expecting rates to remain unchanged. However, the fed funds futures rate is now pricing in up to three rate cuts in 2025 (up from one at the beginning of the year), starting as early as the June meeting.
Volatility Is In The Air
The dominant theme in equity markets so far this year has been volatility. The markets are grappling with potential impacts of a multi-front trade war, recessionary fears and, most recently, the impending threat of a government shutdown.The combined effects of these concerns have led to an abrupt sell-off of risk assets since the middle of February. The VIX (a measure of implied volatility) has spiked to levels we haven’t seen since August, sending the S&P 500 and Nasdaq into tailspins. Both indexes are down more than 10% since hitting all-time highs on February 19.
So, how should investors think about this current market environment? First, the appearance of increased volatility isn’t all that unexpected. As we noted in our Q1 Market Outlook Webinar (linked here), markets have been coming off a historically strong two years with a lot of optimism already reflected in equity prices. This has left the markets vulnerable to an “anything but positive news” backdrop. Recently, growth concerns, coupled with policy uncertainty, have left the markets skittish and investor sentiment frayed.
Second, it is important to point out that volatility is a normal and healthy part of market activity. Volatility flushes out excesses and irrational optimism. Also note that pullbacks and corrections occur frequently in market cycles.
According to a study by LPL Financial, the markets average three drawdowns, one being 10% or greater, each year going back to 1928. Furthermore, the S&P 500 has averaged a maximum intra-year drawdown of 13.9% while still producing an average gain of 13% since the 1980s.
Additionally, drawdowns in secular bull markets are common. The mid-to-late 1990s had one of the strongest bull markets in history, with five consecutive years of 20%+ returns. During that run, there were three drawdowns of 10% or more.
Recent history also encourages us to stay disciplined in the midst of volatility. Stocks are up 13.5% annualized this decade, despite two bear market drawdowns of 20%+ (2020 and 2022). Investors who stayed disciplined and committed have been rewarded.
Closing Time
We note that the current market backdrop is chaotic, with markets seemingly hanging onto the hourly or daily headlines. In these uncertain times, we encourage investors to keep a long-term perspective and to make sure they aren’t doing anything short-sighted in their portfolios at the detriment of their long-term goals and objectives.Volatility, pullbacks and corrections are a natural part of market activity. We’ve been here before, and we’ll be here again. History tells us that those who are well diversified and disciplined in their approach will be rewarded over time, and we feel this time is no different.
We are available to each of you, should you feel the need to talk through how we are addressing volatility in your portfolio.
