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
Animation: The Biggest Tech Companies by Market Cap Over 23 Years
In business, the only constant is change – and for tech companies, this is even more true. Here are the biggest tech companies over 23 years.
The business world is certainly not a static one.
In the past, we’ve shown that the market leaders in the most stable industries are unlikely to keep their leadership positions over long periods of time.
But limit your window to just the dynamic world of tech and you’ll see an even more extreme example of this inherent volatility. Sometimes companies are able to separate from the rest of the pack for days or months, but it’s never an advantage that lasts for long.
Biggest Tech Companies by Market Cap
Today’s animation was originally posted to Reddit by /r/TheNerdistRedditor and captures the crazy world of tech valuations for public companies.
Watch the intense 1 minute animation below:
Note: the data here only lists companies traded on U.S. exchanges, and does not show every single valuation point.
Over just 23 years, the company topping the list flips eight separate times – and if you were to get more granular with the numbers (looking at daily valuations, for example), you’d see it happen far more often.
Today’s Market Cap Leaders
As we noted above, company valuations are constantly changing – and back in early September 2018, both Apple and Amazon even topped the $1 trillion milestone for a short period of time.
Using the same criteria as the above animation, which is based on U.S. listed companies, here are the top 10 tech companies based on data at time of publication:
| Rank | Company | Ticker(s) | Market Cap (March 18, 2019) |
|---|---|---|---|
| #1 | Microsoft | MSFT | $902 billion |
| #2 | Apple | AAPL | $887 billion |
| #3 | Amazon | AMZN | $856 billion |
| #4 | Alphabet | GOOG, GOOGL | $824 billion |
| #5 | Alibaba | BABA | $471 billion |
| #6 | FB | $458 billion | |
| #7 | Intel | INTC | $243 billion |
| #8 | Cisco | CSCO | $236 billion |
| #9 | Oracle | ORCL | $192 billion |
| #10 | Netflix | NFLX | $159 billion |
Based on March 18, 2019 data
This is not a comprehensive list globally, as it misses companies like Tencent which are listed on other exchanges such as the Hong Kong Stock Exchange. Based on recent HKD/USD conversion rates, it’s estimated that Tencent would be roughly worth $450 billion today – good enough for 7th on the list.
Regardless, since change is the only constant in the tech world, it’s fair to say that the above list of the biggest tech companies will likely be much different in just a few months time.
Chart of the Week
The Economies Adding the Most to Global Growth in 2019
Global economics is effectively a numbers game – here are the countries and regions projected to contribute the most to global growth in 2019.
The Economies Adding the Most to Global Growth in 2019
Global economics is effectively a numbers game.
As long as the data adds up to economic expansion on a worldwide level, it’s easy to keep the status quo rolling. Companies can shift resources to the growing segments, and investors can put capital where it can go to work.
At the end of the day, growth cures everything – it’s only when it dries up that things get hairy.
Breaking Down Global Growth in 2019
Today’s chart uses data from Standard Chartered and the IMF to break down where economic growth is happening in 2019 using purchasing power parity (PPP) terms. Further, it also compares the share of the global GDP pie taken by key countries and regions over time.
Let’s start by looking at where global growth is forecasted to occur in 2019:
| Country or Region | Share of Global GDP Growth (PPP) in 2019F |
|---|---|
| China | 33% |
| Other Asia (Excl. China/Japan) | 29% |
| United States | 11% |
| Middle East & North Africa | 4% |
| Euro Area | 4% |
| Latin America & Caribbean | 3% |
| Other Europe | 3% |
| Sub-Saharan Africa | 2% |
| Japan | 1% |
| United Kingdom | 1% |
| Canada | 1% |
| Rest of World | 8% |
The data here mimics some of the previous estimates we’ve seen from Standard Chartered, such as this chart which projects the largest economies in 2030.
Asia as a whole will account for 63% of all global GDP growth (PPP) this year, with the lion’s share going to China. Countries like India and Indonesia will contribute to the “Other Asia” share, and Japan will only contribute 1% to the global growth total.
In terms of developed economies, the U.S. will lead the pack (11%) in contributing to global growth. Europe will add 8% between its various sub-regions, and Canada will add 1%.
Share of Global Economy Over Time
Based on the above projections, we were interested in taking a look at how each region or country’s share of global GDP (PPP) has changed over recent decades.
This time, we used IMF projections from its data mapper tool to loosely approximate the regions above, though there are some minor differences in how the data is organized.
| Country or Region | Share of GDP (PPP, 1980) | Share of GDP (PPP, 2019F) | Change |
|---|---|---|---|
| Developing Asia | 8.9% | 34.1% | +25.2 pp |
| European Union | 29.9% | 16.0% | -13.9 pp |
| United States | 21.6% | 15.0% | -6.6 pp |
| Latin America & Caribbean | 12.2% | 7.4% | -4.8 pp |
| Middle East & North Africa | 8.6% | 6.5% | -2.1 pp |
| Sub-Saharan Africa | 2.4% | 3.0% | +0.6 pp |
In the past 40 years or so, Developing Asia has increased its share of the global economy (in PPP terms) from 8.9% to an estimated 34.1% today. This dominant region includes China, India, and other fast-growing economies.
The European Union and the United States combined for 51.5% of global productivity in 1980, but they now account for 31% of the total economic mix. Similarly, the Latin America and MENA regions are seeing similar decreases in their share of the economic pie.
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