Volatility Tests Your Mettle
by Rob Taylor
Most people understand that stock prices don't go straight up. But when market volatility increases, the price action can test the mettle of even the most seasoned investor.
In recent weeks, stock prices have trended lower with a few eye-popping, one-day rallies as the financial markets appear to adjust to higher interest rates on long-term Treasuries. Since the beginning of the year, we've seen a jump in the yield of the 10-year treasury.1
While investors recognize that economic strength may lead to higher bond yields, it's the speed at which bond yields increased that proven unsetting. Generally speaking, when yields rise, bond prices tend to fall.
It's uncertain what's next for stock prices, but it's possible the current downtrend could take certain market indexes into a correction, meaning a decline of 10% or greater from a recent high. The Nasdaq market has flirted with correction territory as the rising bond yields have upended some high valuation growth stocks.2
But by comparison, the Standard & Poor's 500 index has seen a modest pullback from its closing high set on February 11, 2021. The Dow Jones Industrial Average set an intraday record high in recent trading.2
What matters is what you do next. Right now, it may be best to ignore some of the short-term price swings. Remember, you craft your investment strategy to help pursue your long-term goals, regardless of what the markets do from day-to-day.
You're always welcome to give me a call with your questions. Rest assured, we're keeping a close eye on the financial markets, and most importantly, watching for any new long-term trends that may emerge on your behalf.
1. CNBC.com, March 8, 2021
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
The Dow Jones Industrial Average is an unmanaged index generally considered representative of large-capitalization companies on the U.S. stock market. The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. The Nasdaq Composite Index is an unmanaged index that is considered representative of small-capitalization companies. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
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