Last week (January 25-29, 2021) the U.S. equity markets were roiled by a surge in trading activity in a few stocks of companies in the entertainment industry. The resulting volatility contributed to the biggest weekly decline (~3%) for the broad equity markets since October 2020. Although the gyrations in the market last week were alarming to some, the events did not change the solid underlying fundamentals that drive markets in the long run. TIAA's Investment Management Group (IMG) believes that the events are not linked to the broader financial system. As a result, they are not expected to trigger systemic issues for financial markets.
It's important to note that volatility spikes happen from time to time and are typically not a signal of the health of the financial system or the global economy. Equity volatility similarly spiked briefly in May 2010, and again in August 2015 before settling down quickly. Similar volatility spikes have occurred in U.S. Treasury notes and bonds, most recently in October 2014. Commodity and currency markets also see periodic bouts of elevated volatility without signaling any systemic distress.
The groundwork for last week's market turmoil was laid by the 75% gain in the S&P 500 from the March 2020 COVID-19 lows, historically low rates, very accommodative monetary policy from the Federal Reserve (Fed), the work-from-home environment created by COVID-19, and the rise of social media as a catalyst for action in the physical world. IMG's view is that low rates are likely to be around for an extended period, and the ramifications of COVID-19 for how we live, work, interact and even invest, will continue for many years. As a result, we expect elevated financial market volatility may persist for the foreseeable future.
The large intraday swings in financial markets last week, and indeed, over the past 11 months related to COVID-19 and the U.S. election, help to demonstrate that timing the market (jumping in an out of investments frequently in order to avoid large losses and capture large gains) is difficult, if not impossible. Instead, IMG advocates a long term, or strategic, approach to investing. Our approach uses a well-diversified portfolio of stocks and bonds with allocations to the various asset classes aimed at achieving the long-term goals you have identified through your financial plan.
As we saw last week, in the short term (milliseconds, seconds, minutes, days, weeks, etc.) financial markets can be irrational. However, in the long run, movements in financial markets are driven by fundamentals like earnings, productivity, innovation, monetary policy, and interest rates, etc.
Having a long-term financial plan, a well-diversified portfolio, and a well-thought out process that uses market volatility to rebalance and manage taxes when conditions warrant, are excellent buffers against bouts of market volatility.