On its way to posting a 32% return, the S&P 500 closed at a new high 45 times in 2013. Volatility was muted as there were only 4 trading days when the index moved by 2% or more (measured by close of trading day; data from Yahoo!, Inc.). We could get used to performance like that, but we shouldn’t.
The chart below provides some historical context to the relative absence of large market swings over the past two years. The red bars represent peak volatility years (note 2008 with an incredible 72 trading days of 2% or greater movements). The degree of market price fluctuation is cyclical, and we have been in the middle of a quiet period. This won’t last forever.
Source: Yahoo!, Inc.
The S&P 500 returns for those red bar years were -26.47% (1974), 5.25% (1987), -22.09% (2002) and -36.99% (2008). It is impossible to predict when volatility will reemerge and therefore futile to try to time the market. Our strategy remains to embrace prudent equity exposure mostly through managers who buy only when they find bargains. Their heightened cash levels should provide cushion during the next bout of turbulence…whenever that may be.
Aaron Pettersen, CFA, CFP®