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Markets became more volatile in October, with many big daily moves that have put U.S. stocks down about 10% from their recent record highs. A 10% drop marks a correction, and historically, corrections have occurred about once a year on average. We think this is a return to normal volatility, although it may not feel that way.
Keep in mind that while a 300-point move in the Dow may seem large, this actually translates to a shift of about 1% when the Dow is around 25000. Over the past five years, stocks have changed by 1% or more about 3.5 times per month.
We think higher volatility is likely to persist. As investors digest changing indicators, they’re facing less familiar foods, and markets are experiencing some indigestion. And that translates into sharp and sudden reactions to earnings and economic news, including announcements about trade restrictions and tariffs. The midterm elections could also trigger a bout of volatility.
But higher volatility doesn’t mean the end of the bull market; in fact, it’s frequent in the later part of the economic and market cycle as investors update their short-term expectations. Over time, though, the positive fundamentals are what we think will matter. Strong earnings growth and solid economic growth can drive stocks higher over time.
The outlook is changing in four ways:
Higher market volatility is normal, but it can be uncomfortable. Holding an appropriate mix of investments, focusing on the positive fundamentals and maintaining realistic expectations can help you take a longer-term perspective.
1Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.
2Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
3Past performance is not a guarantee of what will happen in the future.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
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