Over the past week, the equity markets have been faced with some volatility. Before I comment on this volatility, I wanted to provide an analogy based off something many of us have played with at some time in our lives.
Even though this toy most likely originated in China, the first historical mention of it was from Greece in the year 500 BC. Over the centuries different cultures made changes to the toy with the material used to create it being most notable. This toy was first referenced in the United States in 1866. The most widely known company who sold it in the United States was created in 1929 by Donald Duncan. I am talking about a yo-yo and specifically the Duncan Yo-Yo.
When I was in middle school, yo-yos were making a comeback. Everybody wanted to have a yo-yo and at recess people were trying to perform new tricks. From “walking the dog” to going “around the corner”, there were countless tricks people were trying to master. While I did have my own yo-yo and was able to do a few tricks, my future was not in professional yo-yo, but it was still a fun thing to do with friends.
To me, the most basic part of the yo-yo was learning to throw it and have it return to you. From there you could then learn to have it stop at different points along its path. Another way to look at it was, it went up and it went down depending on how hard you threw it as well as the slight movements you made.
A yo-yo can be a good analogy to the equity markets as the markets go up and the markets go down throughout every trading day. This is not a new phenomenon and something we have discussed with you in the past. However, I am going to take this analogy a step further. The length of a yo-yo string is dependent upon the height of the individual. For arguments sake, let us assume you only have access to a 41-inch string. The shorter someone is, the closer to the ground the yo-yo will fall versus someone who is taller. Let us look at the performance of the S&P 500 over various time periods and compare this to a child’s height and the standard yo-yo string.
Using data from Disabled World concerning the height for children from birth to age 20, an eight-year-old boy has an average height of 50.4 inches. The chart below shows the performance of the S&P 500, as reported by Yahoo Finance, for the first eight years of my life.
In the chart below and jumping ahead six years to age fourteen and a height of 64.5 inches, you can see the S&P 500 performance.
Below at age twenty and a height of 69.7 inches, the performance of the S&P 500 is below.
Finally, the recent chart below, at a height of 72 inches and the S&P 500 performance.
While I have certainly grown taller over the years, the charts also show how the S&P 500 has grown. For each time period, if the market was being traced by a yo-yo, you would see the ups and downs. Be it tax rates, recessions, the Internet, you name it, it is almost always possible to create a story for why the market did what it did. These stories are only written after the fact when nearly all the information is known.
Now, as one grows taller, the yo-yo is no longer getting closer to the ground. The standard 41-inch string would naturally be higher, thus allowing more options for tricks. The S&P 500, as time went on, was positive and moving higher. This does not mean there were not periods of downward volatility, but the market had higher lows during those periods of volatility. Meaning while there were low periods, these low periods still had higher market values as when compared to previous lows. Take March 2020, the S&P 500 was at the same level as it was in December 2018. Looking at the S&P 500, as the years have gone by, when the markets have periods of volatility or even market corrections, these low points tend to be at higher levels than prior lows. This shows the power of being invested over the long term through good times and bad.
Recent volatility, after the historic run from the March lows, could be explained as a balancing act. The market is trying to find its footing while considering the:
- Continued threat of COVID-19 and a potential second wave
- Uncertainty concerning economic stimulus
- Recovering economy
- Worry about stocks and if they have run too far too fast
- Trade tensions including US-China and US-EU
- 2020 Election
While the above potential headwinds are apparent right now, we must remember there are always reasons why someone could decide not to invest or to significantly change their investments. One must stay consistent and not try and guess what the markets may do today, tomorrow, or next year. Rather you must control what you can which include your cash flow needs and desire to take risk, amongst many other things.
Finally, we will be hosting two webinars in October entitled “Election 2020: The Economy, Markets and You” on October 8 and October 29. Please look for future emails with additional details and to RSVP.
Have a wonderful weekend.
Chris Zeches, CFP®