Stock market volatility has increased in recent weeks, but GuideStone Financial Resources analyst David S. Spika cautions retirement investors to focus on their long-term investment objectives and avoid impulsive decisions, even as the news of the day can appear alarming.
The recent sell-off in financial markets is a needed correction but does not signal the onset of a near-term economic recession, Spika, GuideStone’s chief strategic investment officer, noted.
“Economic growth is still too strong to indicate a recession is on the horizon,” Spika said. “As we’ve been saying for many months, the increased volatility we’re experiencing is warranted. What we’re seeing is to be expected at the tail end of the longest bull market in history, now more than a decade long.”
Even with the headlines and social media posts noting the markets’ moves every second, volatility as measured by the 30-day VIX volatility projection is at 22, well within the normal range, historically speaking.
As of the close of the markets Friday, Dec. 14, the S&P 500 Index was down 11 percent from its Sept. 21 close. Notably, if the S&P 500 ends 2018 with a negative total return, it would mark the first time since 2008 for such an occurrence.
The key factor influencing the market volatility at this time is concern about the impact of continued Federal Reserve rate hikes – a necessary process given the steps the Fed took following the recession of 2008 when it cut rates to a range between 0 and 0.25 percent and left them at that historically low level for several years. As a result, even the hint that the Fed may pause its rate hike cycle, which may come at the Dec. 18-19 meeting of its Federal Open Market Committee, could send stocks higher, Spika said.
“We have expected heightened volatility, relative to the last several years, in the markets,” he said, “but this is only a return to historic norms and not something investors should lose sleep over.”
O.S. Hawkins, president of GuideStone, a Southern Baptist entity, said retirement investors should keep the long view in mind.
“Markets have historically rewarded those who don’t try to time the markets,” Hawkins said. “It’s important to have a properly diversified portfolio with risk and age-appropriate investments.”
One approach offered by GuideStone to retirement plan participants is the target-date MyDestination Funds. Investors choose the fund that is closest to their retirement date and make consistent, appropriate contributions. The fund automatically becomes more conservative as the target date approaches.
“We have consistently encouraged our retirement plan participants to keep four principles in mind during periods of market volatility and uncertainty,” Hawkins said.
“First, always focus on your objectives, not the emotions brought on by the day’s or minute’s headlines. Second, don’t make impulsive decisions. Third, don’t count gains or losses – consistent contributions to a retirement account afford investors a systematic way of taking advantage of opportunities as the markets ebb and flow. Finally, maintain realistic expectations about market behavior. The day’s social, political and economic events will affect the markets in the short term. However, historically, the markets have returned to profitability over the long term.”
Spika said that volatility will likely continue next year.
“With a divided government in Washington, concerns about trade wars, the fading impact of the recent U.S. tax cuts and the continued impact of Fed tightening, we can expect volatility, both upward and downward, to continue and perhaps increase in 2019,” Spika said. “That is not cause for alarm, nor should it shift retirement plan investors away from their long-term investment strategy.”