Navigating Market Volatility: A look into historical stock market behavior

“The stock market is a device for transferring money from the impatient to the patient” – Warren Buffett

The S&P 500 had a fantastic start to 2024, reaching nearly 20% in returns from the beginning of the year to its peak in July. Shortly after the Federal Reserve’s meeting, the stock market rejoiced over expected September rate cuts. However, just one day later, the market panicked over the release of unfavorable unemployment numbers, causing a 9.67% drop from peak to trough over the next 20 days. This led the VIX, also known as the “fear index,” to spike to its highest level since 2020.

To put historical data into perspective, from 1974 to 2023, the S&P 500 has had an average annual return of 9.90%. It is important to note that the average intra-year correction for the S&P 500 is 13.6%, representing the average decline from peak to trough within a single year during this period. This means that equity investors must be prepared to handle volatility on an annual basis. Furthermore, volatility may occur more frequently during certain months or seasons. August and September have historically had some of the worst average monthly returns, with September being the only month with an average negative return over the last 50 years. While past performance does not guarantee future results, being aware of such data can be useful.

The table below represents the average monthly returns from January of 1974 to December of 2023:

There is ongoing speculation as to why August and September have resulted in below-average market returns. The poor performance may be due to many market participants being on vacation, and portfolio managers using this period to harvest losses before reporting their realized gains and losses for the year. Regardless, it is important for long-term equity investors to be aware of these potential market dynamics, as it may help in managing emotions during volatile times.

Although the market has historically experienced periods of volatility from August to October, this does not mean investors should panic and sell their investments. Instead, it is a good time to review your investments to ensure your portfolio is properly aligned with your risk tolerance and time horizon. Investors may want to review their overall asset allocation. For example, in recent years, the stock market has had good returns, while bonds have experienced negative pressure due to increasing rates. Now may be a good time to review your portfolios and potentially rebalance them. Growth stocks have also outpaced value stocks and small-cap stocks for an extended period, which may warrant some investors to consider rebalancing their equity allocations. Lastly, as we enter the last quarter of the year, it may also be helpful to consider harvesting losses if needed. In any event, it is important for investors to have a strategy in place and avoid making emotional decisions during periods of high volatility.

Any opinions are those of Charles Alfaro are not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this material does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.