LOOKING THROUGH STOCK MARKET VOLATILITY
Recently, if you had exposure to local and global markets, it has been stressful to be an investor. Extreme stock market volatility as a result of a mixture of economic uncertainty, trade tariffs, and investor swings in sentiment, has the global stock markets seemingly alternating between up days and down days. In this month’s Financial View, we look at why stock market volatility is normal and why it pays to look through the noise created by this volatility.
Stock market volatility is an inherent feature of investing, not a sign of fundamental weakness. Markets naturally fluctuate as they react to macroeconomic forces, corporate earnings results, and shifts in investor sentiment. While dramatic swings may feel unsettling, history has shown that periods of turbulence often pave the way for strong rebounds. Investors who stay the course and remain focused on long-term fundamentals tend to benefit, while those who react impulsively risk missing out on eventual recoveries. Understanding the cyclical nature of volatility is essential in maintaining a level head and remaining confident during uncertain times.
We have used the stock market data of the JSE All Share Index going back to February 1985 for our calculations. In that period of time the local stock market has gone from an index level of 933 to a record high of 91 583 index points. A growth of close to 10 000% over 40 years delivering investors an average return of 12%. But those returns have not always been in a straight line, as you can see in the graph below returns have been volatile.
On any long-term stock market graph, it typically starts bottom left hand corner and ends top right corner of your page. As it is an exponential graph often history tends to get “flattened” but on this graph we can still clearly see two major crashes – the Global Financial Crisis of 2008 and the Coronavirus Crash of 2020. However, in our data period going back to 1985 we have seen 6 major stock market crashes in that time.
Each one was truly memorable for the pain that was experienced at the time. Fear was on Wall Street or all over Sandton in our local context, yet the stock market brushed these crashes off and moved higher. In fact, over this period, the market tended to brush market crashes off fairly quickly.
If we look at a rolling 5 year returns of the JSE since 1985 we have only seen one period where the stock market delivered negative returns. And that was in the middle of 2020 where investors had gone through a combination of tepid stock market performance followed by the Coronavirus Crash. The tepid stock market returns are clear in the context of the South African economy struggling through the Zuma lost decade.
The danger of looking at any of these charts or considering market volatility is to suggest that if one can avoid the worst of the down days one would automatically be better off. We as humans have a natural risk aversion that we have inherited from our ancestors. The person that didn’t run from the ravenous carnivore invariably ended up being the meal. Humans tend to react more strongly to negative stock market moves than to positive ones. This is due to the loss aversion applying to investments, where people feel the pain of losses more intensely than the joy of equivalent gains.
When markets decline, investors often experience fear, anxiety, and even panic, leading to impulsive decisions like selling assets prematurely. This emotional response can result in missing out on eventual recoveries. On the other hand, when markets rise, investors feel optimism and excitement, but these emotions are generally less intense than the distress caused by downturns.
Summary
There are a number of differing studies on the point of trying to time the market so we don’t need to repeat everything in this piece, but the recent market volatility gave a clear indication of how exiting the market will result in you banking your loss and almost guarantee that you miss the best days of the recovery. Our JSE fell 10% in three days at the start of the month. If this had caused the investor to shift lanes into cash, they would have missed out the rest of the month where these losses were not only recovered but the market subsequently moved up to new all-time highs.
The best investment is a well-diversified portfolio with the use of differing asset classes, both local and offshore that will provide risk mitigation. This will make your portfolio resilient to short-term noise and, while you may still have days of negative returns, over the longer term, your investment experience should start in the bottom left corner and finish in the top right corner.
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