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Navigating Market Volatility: Understanding the Current Landscape

Navigating Market Volatility: Understanding the Current Landscape

April 18, 2024

As we navigate the twists and turns of the financial markets, it's essential to ground ourselves in historical context. The recent downturn in the S&P 500, down 4.6% from its peak closing price at the end of March, might feel unnerving, but it's vital to recognize that what we're experiencing is part of the normal ebb and flow of market volatility.

Consider this: since 1928, the median intra-year drawdown stands at -13%. In 2024, the first three months of the year were remarkably smooth, which could have lulled some into a false sense of security. However, the reality is that 5% declines happen, on average, every 1.1 years, while 10%, 15%, and even 20% declines follow similar patterns at intervals of 1.6, 2.5, and 4 years respectively.

Understanding the driving forces behind the recent market movements sheds light on the current situation. Two primary factors stand out:

1. Inflation Concerns: Recent inflation metrics have defied earlier market expectations, remaining stubbornly high. This unexpected persistence has prompted a recalibration of future interest rate perspectives by the US Federal Reserve. Initially, the market had priced in three rate cuts for 2024, but now, that expectation has dwindled to just one. Chairman Powell's recent remarks underscore the uncertainty, stating that the data suggests a longer-than-anticipated timeline for inflation to recede.

2. Valuation Realities: Since the rally in November of 2023, company valuations have soared to unprecedented levels. The CAPE Shiller PE ratio, a key measure of valuation, currently sits at 33.27, significantly above its historical mean of 17. This frothy market sentiment, coupled with an extended bull run, has inevitably led to heightened volatility.

At our firm, we anticipated these developments and proactively positioned portfolios to weather such volatility without undue stress. Our approach is rooted in aligning our clients' volatility thresholds with their actual experiences in the market. By understanding each client's risk tolerance and crafting portfolios accordingly, we aim to provide stability and peace of mind amidst market turbulence.

In conclusion, while market fluctuations may be unsettling, they are an intrinsic part of the investment journey. By staying informed, maintaining a long-term perspective, and partnering with a trusted advisor, investors can navigate these challenges with confidence. If you have any concerns or questions about your portfolio, we're here to help.

Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. No recommendation should be inferred from any information presented in this articleA diversified portfolio does not assure a profit or protect against loss in a declining market.