The Tragic Cost of Market Volatility
According to Lipper data, investors moved a staggering $190 billion into money market funds (cash) in Q4 2018. The last time investors fled risk assets in such large numbers was during the 2008 global financial crisis.
With the benefit of hindsight, we know that the decision to go to cash in Q4 2018 likely came at a steep - what I call 'tragic' - cost.
Since Christmas Eve, when the S&P 500 touched bear market territory with a ~20% decline from September highs, the market has rallied strongly: up +12.05% through last Friday, February 8. January 2019 delivered the best rally to start a new year in over 30 years.
But for investors who went to cash in Q4, I wonder how many of them sold when the market was at or near the bottom, and I also wonder how many investors either
1) remain on the sidelines today as a result; or
2) got back into stocks only partway through the current rally.
Neither outcome seems desirable to me.
But there's still more to consider when it comes to the current rally, the biggest being the possibility that investors who missed the upsurge may not get much of a second chance.
This bull market is now in its 10th year, and all signs point to overall slower global economic growth and fading corporate earnings growth.
Q1 2019 is already looking like it could be a flattish period for earnings growth, and full-year 2019 growth is expected in the mid-single digits - a far cry from 2018.
Since 1926, stocks rose an average of +34% before dividends in the 12-month period following a correction (when stocks fall 10% - 20%).
After bear markets, when stocks decline 20% or worse from a recent peak, the next 12-months average 47%.
The takeaway from this data is one that we've known all along - equity markets tend to rebound just as quickly as they decline, often whipsawing investors who try to time entry and exit.
Source: Zack's