What is Market Volatility?

Market volatility is the term used to describe the magnitude of price fluctuations in the financial markets over a particular period. While it might initially sound intimidating, volatility is a natural element of the market environment. It indicates the degree of variation in trading prices and can be measured by standard deviation or variance between returns from that same market index or asset.

Causes of Market Volatility

Several factors can contribute to market volatility. Economic announcements, such as changes in interest rates by the Federal Reserve, geopolitical events, and company-specific news can all cause sudden changes in stock prices. For instance, an unexpected earnings announcement can lead to significant price shifts for a company’s stock, thus impacting the market as a whole.

How Volatility Affects Investments

Volatility can have both positive and negative impacts on investment portfolios. On one hand, it offers opportunities for investors to generate profits by trading assets that are fluctuating in price. Conversely, it can also lead to losses for investors who may have to sell assets at lower prices during downturns. This unpredictability highlights the importance of having a plan in place when there is an increase in market volatility.

We’ve Been Here Before

Investors can employ strategies to manage market volatility effectively. It is important to set a clear investment plan and adhere to it, which involves thoroughly assessing one’s risk tolerance and making informed decisions based on individual financial circumstances. Working with an asset manager like Trademark Capital can provide additional insights into managing clients’ portfolios during volatile periods.

Over many years, our strategies have navigated various corrections and bear markets stemming from different economic and valuation conditions. A key reason for this historical resilience lies in our reliance on rules-based, time-tested investment models. Using objective models to guide investment decisions helps us manage both risk and potential opportunity.

Importantly, this disciplined approach helps mitigate the common behavioral finance pitfalls where investors, driven by fear or greed in the heat of the moment, make poor investment decisions. Our strategies, by contrast, have no emotions and respond to market conditions based on our economic model.

Market corrections greater than 10% are not unusual; the graph below illustrates they have occurred roughly every couple of years over the past 15 years. Sometimes, multiple corrections occur within a year, especially after extended market advances, as seen in 2015-2016 and 2018. While each correction has its own catalyst, our objective models are designed to adapt.

Trademark Capital deliberately employs multiple, objective models. This approach allows us to manage risk consistently, not just during challenging times like now. It also positions us to identify and act on potential opportunities that often arise following significant market declines.

We believe in responding to market behavior, not simply reacting. Reacting implies acting without a plan, whereas responding involves executing rules designed for various conditions, whatever the cause. Think of emergency services – they are first responders, trained to act methodically under pressure.

Conclusion

Understanding market volatility is essential for all investors as it is a fundamental aspect of investing that affects decisions and outcomes. While volatility can create challenges, it also brings opportunities. Preparedness and strategic planning are crucial in navigating these market shifts effectively, ultimately fostering resilience in your investment journey.

We understand market volatility can be unsettling. Our focus remains on navigating these conditions using our disciplined, model-driven approach.

If you’re interested in including Trademark Capital’s investment strategies in your clients’ portfolios, please email mallory@trademarkcapital.com. 

Thank you,
The Trademark Capital® Team