Market Analysis

Market Volatility and You

Thursday's market delivered another drubbing to investors. A third test of recent market lows surely proves tried and true investment disciplines no longer work, right? Wrong!

Story Highlights:

  • Thursday's market action brought the pain to investors, along with a third test of recent market lows.
  • Market swings like this feel awful and seem to confirm investor fears of more pain ahead.
  • During turbulent times folks make investing mistakes because they abandon tried and true investment disciplines made for these exact market environments.


Ouch! Did you feel that? Thursday's global market drubbing may have left a mark, but if you're investing for the long term, there won't be any permanent scars—assuming you remain calm and avoid self mutilation.

Of course, that's easier said than done these days. Many otherwise rational pundits are scrambling for the exit doors and encouraging anyone who'll listen to join them in the stampede. We've got a third test of recent market lows (a triple bottom correction), the Royal Bank of Scotland predicting a "market crash," and an old, obscure technical indicator shaking off dust to predict more pain ahead—not to mention the familiar credit and oil worries to deal with. Everyone and their mother emphatically believe stocks should be abandoned.

To this, we have a one-word response: Bullish!

Okay, we can feel your confusion (and possibly disbelieving anger). Why on earth remain bullish in the face of what is widely viewed as "the worst financial crisis since the Great Depression?" Well, one reason is that it's not the worst financial crisis since the Great Depression:

GDP Stronger Than First Thought, As Growth Is Revised Up to 1%
By Brian Blackstone and Maya Jackson Randall, The Wall Street Journal

And this is just the US. The global economy is having a fine year so far. The fact is economic numbers across the globe are consistently coming in better than average expectations. The economy continues to show strength where it's not expected—and that's terribly important. Most pundits were sure they'd have some negative GDP figures by now to back their predictions. But they remain as elusive as positive investor sentiment these days. When the economy continues to do better than expected, especially when it's not expected to do well, it's a longer-term bullish sign. And so are panicky articles encouraging folks to employ tactics unbefitting a prudent long-term strategy:

Birinyi Says Buy-and-Hold Not Working in U.S. Stocks
By Lynn Thomasson and Betty Liu, Bloomberg

Don't underestimate how telling such a headline is. When experts forsake the idea that stocks will deliver a superior long-term return compared to alternatives, you know sentiment is really in the tank.

But what about the fact we've revisited recent lows—a third time! Surely this puts us in either uncharted or bear market territory, yes? No, it doesn't. Believe it or not, there have been a few triple bottom corrections throughout history. Single, double, or triple bottom—it's no more indicative of future market direction than flipping a coin. Ultimately, testing previous market lows in a short period, while painful, tells us nothing about what will happen next.

Ever hear that familiar saw about past performance not being indicative of future performance? It's on pretty much every piece of investing literature for a reason. While it seems an easy conclusion to assume January and March lows foretold the recent pullback, don't let this cognitive error sway you from a long-term discipline—this is rearview thinking and dangerous to your long-term investing objectives.

This triple bottom is a result of unusually persistent dour sentiment. And psychology is perfectly capable of jolting the market over short timeframes. Those investing for the long term should acknowledge this and stay cool amid the volatility. It might feel painful, counterintuitive…against every fiber in your very being to stay in stocks now! But that in itself is telling. If behavioral finance has taught us anything, it's that we're too often our own worst enemy, particularly in times of high emotion.

Market volatility can seem almost unendurable at times—but if investing in the market was easy, everyone would do it and everyone would be a billionaire.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.