It certainly feels as if Mr. Market has reverted back to being a toddler: happy one minute and cranky the next. Those who own highly valued momentum stocks such as Netflix (NFLX) and Facebook (FB) have certainly felt the impact of the volatility.
Though some stocks have been whipsawing, the markets overall have been less volatile than they feel or some headlines suggest. As of last Friday’s close, the S&P was just 3.9% below its record high closing. The large-cap index has also only ended up or down by 1.5% or more four times this year. The action feels more volatile because the recent decline has occurred quickly, as downward moves typically do. Plus, last year was a calm one. I counted just eight days with a closing price change of 1.5% or greater and only four days with a closing price change of greater than 2% for all of 2013. Depending on what stocks are in your portfolio, you may have experienced more or less volatility than the S&P 500 has this year.
As to whether the recent decline is a precursor of a market correction, I couldn’t tell you. The same holds true for all market forecasters. We are about to enter what has historically been the worst six-month period for stock prices (May through October). On the other hand, optimism in the AAII Sentiment Survey is at a level that has historically been followed by above average S&P 500 returns. Neither indicator has a perfect record, so we might have better accuracy trying to predict who is going to win this year’s World Series.
What can I say is those who stayed invested in stocks all of last year have a nice profit cushion to ride out any retracement that occurs this year. Even if a painful correction of 15% were to occur (and I’m NOT saying it will), a sizeable profit will still exist for an investor who bought an S&P 500 index fund at the start of 2013.