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Coronavirus and Volatility Clustering

Investment Insights

Do not let short-term volatility affect your long-term plan

We try to avoid cliches, but often a picture really is worth a thousand words. Here, our goal is to distill a timely market topic into just a few words and a chart.

CORONAVIRUS AND VOLATILITY CLUSTERING

Writing about the novel coronavirus is a difficult task. Thinking about the market ramifications of such a large-scale human tragedy seems trivial (and our thoughts are with all those affected), but it is also difficult because it is unprecedented. In a month’s time, the virus went from virtually unknown outside of China to THE topic in markets and media. China’s government has quarantined entire cities; major firms have shuttered Chinese operations. It is uncharted territory.

Markets despise uncertainty. And to call the ultimate effects of the coronavirus “uncertain” would be understating the issue. So what happens in truly uncertain markets, when outcomes are varied and risk is unquantifiable? Volatility emerges. Markets move up and down with a vengeance, quickly and often.

Below is a chart of every 1%+ daily move in the S&P 500 (up or down) over the last year. As you can see, volatility in stock markets has a way of clustering. A large move in either direction on a given day is much more likely to be clustered with other volatile days. Markets can go months without a 1% move (and very recently did), lulling investors into a sense of calm before a sudden event shatters that reality. In August, it was yield curve inversion; in October, recession fears.

But why does this matter? Well, volatility clustering means that when things get crazy, they get REALLY crazy. Humans are emotional, making us inherently flawed investors. And when volatility returns to the market, we can act irrationally, particularly in a financial media environment that tends to stoke fear (and ultimately trigger ill-advised selling).

Volatility is the price investors pay for the potential of long-term gains. Our message is the same as ever: do not let short-term volatility affect your long-term plan. If, however, stock market volatility proves too much, working with a Baird Financial Advisor can be critical to ensuring that your risk tolerance is suitable and that you have a stable, long-term plan in place.


Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2020 Robert W. Baird & Co. Incorporated.