April may bring a halt to the decline in stocks.
But heightened volatility may not be going away.
Staying invested with a diversified portfolio may be the best way to “master” investing in the coming years.
When will the high volatility in the stock market come to an end? Although that seems like a good question, it may be the wrong one to ask for investors who are only worried about the end of the stock market correction. The correction could be over soon, but the heightened volatility may not be going away for a long time.
Correction might be over
April could break the string of back-to-back losses for global stocks seen in February and March of this year, if seasonal patterns hold. Historically, April has been the month with the highest average gain and second only to December as the month with the fewest losses—April saw a loss in only seven of the 30 years since the inception of the MSCI AC World Index in 1988. Interestingly, April even posted gains in 2008 and 2009, during the financial crisis. At the halfway point (mid-month), April has posted gains so far.
April tends to be a good month for global stocks
Source: Charles Schwab, Factset data as of 4/13/2018. Past performance is no guarantee of future performance.
Another historical pattern is pointing to a rebound, as well. On average, stocks fall for about 13 weeks after a correction before beginning to rebound. You can see this rebound in the chart below, which presents the current market moves with the market patterns during corrections (declines of 10-20%) and bear markets (declines of more than 20%) in the MSCI World Index since 1979.
Stock market correction might soon be over
Source: Charles Schwab, Bloomberg data as of 4/12/2018. Past performance is no guarantee of future performance.
These historical patterns may hold, suggesting that the stock market may revive as the earnings reporting season unfolds and tax refunds are invested over the remainder of this month. Of course, markets could still suffer losses this month as worries over trade wars, currency wars, and actual war—among other factors—combat investor confidence.
It’s possible we could see a break from the losses this month, but not necessarily from volatility. Investors often associate volatility with losses—but that isn’t always the case. Stock markets have just as often seen high volatility when markets are rising as when they are falling.
Volatility may stick around
History shows us that the current pick up in volatility may be with us, not just for a couple of months or even all of 2018, but for several more years to come. Volatility in the form of 1% or more daily prices changes tends to rise in the last couple of years of an economic cycle, ahead of a recession and bear market, and remain high for a year or two after the bear market is over and a new bull market has begun, as you can see in the chart below.
Volatility is cyclical
Source: Charles Schwab, Bloomberg data as of 4/12/2018.
The chart shows that volatility isn’t simply low until a global recession causes a bear market to pull stocks down sharply. Instead, between the shaded bear markets volatility tends to be elevated in the bull market years ahead of, and following, bear markets. The rise in volatility in 2015-16 was unusual for a mid-cycle environment and vanished in 2017, but the rise in daily price changes in 2018 is typical for the final years of a bull market.
The higher volatility doesn’t mean you should fear investing since markets tend to produce double-digit gains late in the economic cycle as volatility is rising. In fact, during the two years of rising volatility before each of the three bear markets associated with the recessions in the above chart began the MSCI AC World Index posted an average annualized gain of 19%, as you can see in the table below.
Late cycle markets featured rising volatility amid strong gains
Manage the volatility
Staying invested with a diversified portfolio can help manage the volatility in your portfolio as the frequency of 1% or more daily moves remains high. A reminder of how global diversification can be seen everywhere was evident at April’s 2018 Masters’ Tournament. With this year’s win by American Patrick Reed, the geographic distribution of the home countries of the winners of Masters Tournament from 1978-2018 is very similar to the stocks in the MSCI All Country World Index.
World-class performers: winners can come from anywhere
Geographic distribution of Masters winners and stocks in the MSCI All Country World Index
Source: Charles Schwab, TheMasters.com, Factset data as of 4/9/2018.
It's increasingly obvious everywhere we look around the globe that we can find world-class performers in many areas from sports to stocks. With the long-term rise in economic diversification and the more recent trend toward increasing market volatility the value of allocating to international developed and emerging markets as part of a diversified portfolio becomes increasingly compelling for those who wish to master investing.