What It’s Worth

What It’s Worth

Addressing Concerns Regarding Stock Market Volatility

Author: Rich Wyatt, Chief Investment Officer, PlainsCapital Bank Wealth Management
Published Date: 10/12/2018

The mere mention of October is enough to frighten some investors, while others wonder, “What’s the big deal?” It all comes down to perspective. Sure, five of the stock market’s worst 10 days happened in October — including 1987’s more than 20 percent plunge — but historically, it’s a generally average month for the U.S. stock market.

That said, U.S. stocks took a significant slide on Wednesday and Thursday of this week, as the Dow, S&P 500, and NASDAQ each lost more than five percent of their respective values. The declines included the biggest single-day percentage drops for the indices since February of this year, prompting overseas markets to tumble as well.

It’s often difficult to pinpoint the exact cause for any bad day in the markets. Often it’s simply a number of individual catalysts coming to a head. Rich Wyatt, PlainsCapital Bank’s Wealth Management Chief Investment Officer, responds to some of the questions that people are asking in light of this week’s events.

PCB: What are the main culprits being cited for this week’s stock market fall?

RW:  While trying to identify the causes of a market drop within 48 hours is difficult, there are few things that are being talked about:

  • An International Monetary Fund (IMF) report stating that the global economy is plateauing (with trade tensions largely to blame). Slower growth, all else being equal, makes relatively high stock valuations look even higher to investors.
  • Rapidly increasing interest rates. The 10-year Treasury spiked about 30 basis points over the last month to as high as 3.23 percent, after having already more than doubled since its lows in the summer of 2016 of roughly 1.35 percent.  However, the current level of 3.14 percent is by no means historically high and is just barely giving a real (inflation-adjusted) return.  But the speed of the increase has spooked investors of bonds and stocks alike (with bonds offering little protection in this correction, it makes the overall situation feel even worse).
  • Of the few companies that have begun reporting in this earnings season, several, while still beating estimates on balance, gave poor forward guidance, citing margin pressures from higher wages and input costs (partially related to tariffs).

PCB: When there is an 800-point drop—or 1,000-point drop, like in February—does the value simply vanish?

RW:  The financial press likes quoting figures where value is “wiped out” when it really is not that important for the long-term investor, particularly in isolation. For example, the fact that Amazon lost more than $70 billion of market value over a couple of days is not that consequential to investors in the stock, particularly if they held it longer than just those two days. Maybe for day traders, those types of comments are more appropriate, but that is an exception, not the norm. More important to long-term investors is that the market cap is still up over $250 billion since the beginning of the year.

PCB: In light of the current volatility, what are other investment options? Real estate, CDs, gold, silver?

RW: Great question. Any of these can be an important part of an investment plan, as all have the potential to diversify a strategic portfolio. While there are many new and exciting developments in the investing landscape, asset allocation (or what assets are held and in what percentages of a total portfolio) of an investment plan remains the most important factor in constructing a portfolio. Diversification among asset classes, like stocks, bonds, CDs, commodities, etc., helps prevent big drawdowns that are more difficult to recover. For sure, there are times when almost every investment drops, but over time, a good mix of different assets is a prudent way to protect a portfolio and create a “smoother ride.”

Of course, diversification works both ways. You also cannot expect to get a 20 percent or higher return, like the S&P 500 had last year, if you have other investments in the portfolio. Again, taking a longer-term perspective and not focusing on individual time periods in isolation is important.

PCB: What to do next? Should someone in their 60s sit tight and stay invested?

RW: This is probably one of the most challenging questions to answer. Younger people should definitely sit tight. But people who are closer to retirement or already retired have a more difficult decision to make… How quickly do you need the money? Do you have other savings on hand to utilize should things get worse?  

It is very important to have a plan so that when volatile times like this week happen (which they generally happen more often than we have felt over the last 10 years), there is no need to be reactionary. Advice we would give to clients is that if their plan is solid and long-term in nature, then the effects of one week should not matter. We do a lot of work with clients on the front end of a relationship and over the years – talking about goals, risk tolerance, future wishes, etc. – so that when volatile times happen, while concerning and certainly stressful, we do not need to change course. Solid investment plans are built to withstand the test of time and the inevitable, and unavoidable, downturns in asset prices.

To speak with a PlainsCapital Bank Wealth Management professional about financial investment and savings strategies, visit the PlainsCapital Bank website or email wealthmanagement@plainscapital.com to be connected with a wealth management advisor.

Tags: Wealth Management,Personal Banking