Keep Calm, Avoid Kneejerk Reactions to Volatility

When markets do the unexpected, it can test the nerves of even the savviest investor. And negative headlines in a 24-hour news cycle can make it difficult to filter the noise. But it’s important to remember that volatility is normal. The correction we’ve seen during the last few weeks due to Russia’s invasion of Ukraine and rising inflation in the United States is a sobering reminder that markets can swing wildly in short periods of time.

In fact, the CBOE Volatility Index, or VIX, has more than doubled to 35 (March 7) since the start of 2022. While it’s tempting to have kneejerk reactions to such tumult, exercising patience and discipline helps keep investors on track to hit their long-term goals. Investors tend to get hurt when they lose sight of their long-term goals or can’t stomach short-term volatility.

Fortunately, whether it’s geopolitical tensions like war in Ukraine or some other disruptive market event, the stock market has historically shown resilience in the face of adversity and these downturns tend to be short-lived. While painful, multi-month corrections are common. Indeed, the average intra-year drop for equity markets over the past 30 years has been 13.7%.

While risks abound, there is good cause for optimism. Economic fundamentals remain on solid footing. Manufacturing activity remains robust as the PMI from the Institute for Supply Management rose to 58.6 in February from 57.6 in January. The index has been above 50 for 21 months, which signals the U.S. economy remains firmly in expansion territory. For 2022, we expect positive corporate earnings growth, which is a chief catalyst for stock valuations.

Looking ahead, we believe U.S. growth should remain well supported by consumer spending even though confidence has taken a hit with the recent unrest and so much pain at the pump. While inflation remains a key concern, the Fed’s pivot to a more hawkish policy stance inspires confidence that price pressures will ease eventually as supply chain disruptions fade. We continue to expect that a growing U.S. economy will help fuel a global recovery as U.S. import demand draws in goods and services from around the world.

Still, trying to get the timing right on when the market will outperform is a fool’s errand. A triedand-true investment corollary that we champion is that time in the market is more critical than timing the market. For example, history has shown that missing the market’s best days is far worse than being invested during its worst days. Behavioral finance has taught us that the most common mistakes investors make are when they’re acting on impulse in the face of a sharp selloff. How do you combat self-sabotage? Keep calm and consult with your financial advisor on how to dampen the effects of volatility.

At Oppenheimer, we emphasize knowing what you own and why own it and sticking to a long-term financial plan. However, spikes in volatility may present attractive opportunities to broaden diversification, buy on the dip or adjust allocations toward sectors and styles that are more defensively positioned or poised to benefit. Like most important decisions in life, how to invest should be a thoughtful process that is free of emotion. That’s why we recommend investors maintain a longer-term view and share any concerns they may have with their advisor. In the end, losing your head when markets crater can lead to rash decisions that could sink your portfolio.

Reach out to your Oppenheimer Financial Professional if you have any questions.