Stocks have been cruising since October 2023. But trading is getting choppier as macro risks pile up. Every week seems fraught with fresh tape bombs. Before you decide to hit the exits, consider three things about uncertain times and rising volatility, writes Alec Young, contributor at MAPsignals.
Reason #1 you shouldn’t overreact to recent market volatility is that history shows stocks don’t need fast economic growth to rise. Since 1970, the Russell 3000 Index has posted positive returns 87% of the time with real GDP growth between 1.5% and 3%, and 71% of the time when growth has been positive but below 1.5%.
Recessions have been the only economic regime associated with weak stock performance. The Russell 3000 has only risen half the time when growth has been negative (chart).
Reason #2 you shouldn’t overreact to recent market volatility is that, while macro uncertainty often rules the short-term, stocks follow earnings over time. The reality is most of the short-term risks investors fret about day-to-day never threaten earnings. The GFC and Covid pandemic were the only two big outliers reducing earnings over the past 20 years.
Reason #3 to not overreact to recent market volatility is the fact that bear markets come along once every seven years on average. Most of the time, we’re looking at 5%-10% equity haircuts where losses are recovered quickly:
