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Volatility is Back!

During 2017, U.S. stock markets had the least volatile year on record and hit new highs continuously throughout the year. At the end of 2017, we got tax reform and a subsequent surge in January with the S&P up 5.6%. It appeared that investors were convinced the rally would continue and piled in for fear of missing the next new high. Recently however, sediment has shifted, and the markets have given up all their 2018 gains. The S&P 500, as of the close on February 8th, was down 10.2% from its all-time closing high set on January 26th. Many pundits are describing the “reasons” for the pullback. In our yearend newsletter, we mentioned that long-term investors should always keep a close eye on the amount of risk they are taking. Corrections can happen without warning and can last for a few weeks or several months. 

As the enclosed chart illustrates, in every year since 1980, there has typically been a market pullback at some time during the year. However, it is not an indicator of how the year will end. The bottom part of the chart is the degree of pullback that happened during the year. The top part of the chart shows how the year ended. Bottom line is: pullbacks of 10-15% are typical and expected, even when the backdrop of the economy is strong like what we have today. Interest rates are inching up, which has not happened for many years. Inflation is slightly higher, which has not happened for many years. These are natural consequences of an economy that is strong and getting stronger with the tax cut, possible new fiscal stimulus (with a potential for an infrastructure bill) and very low unemployment. 

As markets hit various metrics and milestones, program trading kicks in and can create more volatility. This may be what is happening. As you know, we recommend that investors have cash in short-term, high quality investments for short-term needs. Longer-term growth assets should not be changed unless your circumstances have changed during market periods such as these. The bottom line is the fundamentals of the economy are strengthening and higher interest rates are a byproduct of a stronger economy. Since pullbacks are typical but unnerving, staying focused on the long-term is the best approach.  


*Past performance may not be indicative of future results. Expressions of opinions are as of this date and are subject to change without notice. Any opinions are those of Sherri Stephens and not necessarily those of RJFS or Raymond James. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. 

Diversification and asset allocation do not ensure a profit or guarantee against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note direct investment in any index is not possible. 

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, St. Petersburg, Florida. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Stephens Wealth Management Group is not a registered broker/dealer, and is independent of Raymond James Financial Services.

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