Markets
5 Lessons About Volatility to Learn From the History of Markets
In 2018, the re-emergence of volatility took many market participants by surprise.
After all, aside from a few smaller, intermittent spikes over the course of the current bull market, volatility has largely been in a long-term downtrend since the aftermath of the 2008 Financial Crisis.
Whether there is more volatility lurking ahead this year or whether the markets continue to calm, it’s worth looking at the last century of market history to put these recent bouts of volatility into context.
Learning From the History of Markets
Today’s infographic comes to us from New York Life Investments and it goes back in time to show us that the volatility experienced in 2018 was neither exceptional or unusual.
Here are five important lessons to learn from it all:
With volatility back on the table again, investors are re-learning what it’s like to cope with a sometimes tumultuous market.
Higher volatility can be a source of uncertainty for even the most seasoned investors, but a look at historical data over the last century helps to ease these concerns.
5 Lessons About Volatility
Here are five lessons about volatility that we can learn from the history of markets:
Lesson #1: Volatility isn’t new
Volatility isn’t a new phenomenon – and it’s actually as old as the stock market itself. In fact, if you look at historical swings in the Dow Jones Industrial Average, you’ll see that many of the biggest ones were more than 80 years ago.
Lesson #2: Volatility is actually the status quo
In the last century, volatility has been ever-present in the markets, and between 1935 and 2018 the S&P 500 has seen:
- 4,563 total days with +/- 1% price movements
- 1,094 total days with +/- 2% price movements
That works out roughly to a 1% price swing every trading week – and a 2% price swing every month. Yet, over this lengthy time period, and after all of that volatility, the S&P 500 has grown by 25,290%.
Lesson #3: Any short-term volatility disappears with a long-term view
Daily price swings can feel like a roller coaster. But if you take a step back and look at the big picture, this volatility is just a blip on the radar.
For example, if you look at a chart of the S&P 500 from August 1990 to February of 1991, you’ll see that daily volatility was rampant. But zoom out to a 10-year chart, and these daily or weekly swings are barely noticeable.
Lesson #4: Volatility can be easily weathered with a resilient portfolio
Given that volatility has been around forever and that it’s extremely common, that makes it fairly unavoidable. Therefore, to weather periods of volatility, it is imperative to build a resilient portfolio by diversifying between different asset classes.
Certain assets are better at weathering periods of volatility than others. Here are some traits to look for:
(a) Low correlation with the market
These assets can zig when others zag, making them a valuable hedge (Examples: Gold, alternative assets, municipal bonds)
(b) Generates cash flow
When times are uncertain, the market puts extra value on assets that are generating real cash flow (Examples: Stocks that pay dividends, or bonds that pay interest)
(c) Defensive or non-cyclical
During uncertain times, there are still companies with stocks that will thrive. They are usually bigger companies with conservative balance sheets and durable competitive advantages. (Examples: Quality stocks in healthcare, consumer staples, telecoms, REITs, and utilities sectors)
Lesson #5: Volatility reminds us that there is no reward without risk
Investing in stocks comes with risks, but it also comes with the best returns over time:
Asset Type | Annualized real return, 1925-2014 |
---|---|
U.S. Equities | 6.7% |
Government Bonds | 2.6% |
Cash | 0.5% |
If stocks offer the best long run gains – and volatility is an unavoidable aspect of investing in stocks – then we must learn to accept volatility for what it is.
Even better, we must learn to build resilient portfolios that can weather any storm, while minimizing these effects.
Markets
Will Tesla Lose Its Spot in the Magnificent Seven?
We visualize the recent performance of the Magnificent Seven stocks, uncovering a clear divergence between the group’s top and bottom names.
Will Tesla Lose Its Spot in the Magnificent Seven?
This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.
In this graphic, we visualize the year-to-date (YTD) performance of the “Magnificent Seven”, a leading group of U.S. tech stocks that gained prominence in 2023 as the replacement of FAANG stocks.
All figures are as of March 12, 2024, and are listed in the table below.
Rank | Company | YTD Change (%) |
---|---|---|
1 | Nvidia | 90.8 |
2 | Meta | 44.3 |
3 | Amazon | 16.9 |
4 | Microsoft | 12 |
5 | 0.2 | |
6 | Apple | -6.7 |
7 | Tesla | -28.5 |
From these numbers, we can see a clear divergence in performance across the group.
Nvidia and Meta Lead
Nvidia is the main hero of this show, setting new all-time highs seemingly every week. The chipmaker is currently the world’s third most valuable company, with a valuation of around $2.2 trillion. This puts it very close to Apple, which is currently valued at $2.7 trillion.
The second best performer of the Magnificent Seven has been Meta, which recently re-entered the trillion dollar club after falling out of favor in 2022. The company saw a massive one-day gain of $197 billion on Feb 2, 2024.
Apple and Tesla in the Red
Tesla has lost over a quarter of its value YTD as EV hype continues to fizzle out. Other pure play EV stocks like Rivian and Lucid are also down significantly in 2024.
Meanwhile, Apple shares have struggled due to weakening demand for its products in China, as well as the company’s lack of progress in the artificial intelligence (AI) space.
Investors may have also been disappointed to hear that Apple’s electric car project, which started a decade ago, has been scrapped.
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