Compared to an extraordinarily tranquil 2017, the S&P 500® Index has been on a wild ride so far this year. After posting the best January return since 1997, it fell into correction territory in early February and has since struggled in the wake of uncertain trade policy and political tumult.1

How normal is the current volatility?

Since 1988, the market has dropped by more than 1% an average of 29 days a year, but we saw only four such drops in 2017. So far this year, we have seen 16 days with a 1% or greater drop. Annualize that number and we are only slightly above the long-term average. This back-to-normal volatility has been healthy for capital markets, easing the froth of stretched valuations in the US and curtailing the euphoric exuberance that had global stocks trading at the widest margin above their 200-day moving average over the last 10 years.2

Geopolitical and domestic discord could thwart growth

As the economic cycle matures, monetary policy becomes tighter and there is less room for growth to exceed expectations. Investors searching for the next leg of growth will need to contend with erratic geopolitical tensions from North Korea to Iran. While these flashpoints may alternate between positive and negative headlines, it's possible for a geopolitical event to manifest itself into market-driving policies or actions. Plus, Brexit and a new Eurosceptic regime in Italy will continue to make waves.

In the meantime, President's Trump's proclivity for provocation and tendency to disregard historical norms in favor of direct, but seemingly contentious actions continues. His combative and unpredictable approach to trade negotiations with major US trade partners—China, Canada, Mexico and Europe—likely may heighten economic uncertainty and spark more volatility in risk markets. The results of November's US midterm elections could also impact the administration's legislative agenda, potentially increasing already elevated political gridlock.

So, welcome back to the reality of non-linear returns marked by episodic volatility caused by endo-and-exogenous events. In this uncertain political environment seemingly destined for higher volatility, more erratic price action, and head-spinning rhetoric out of D.C., investors may wish to consider sticking to their long-term investment goals and focus on diversifying their portfolio and adding ballast with ultra-short bonds.

Implementation ideas

  • SPDR® Gold Shares (GLD®)
  • SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL)
  • SPDR SSGA Ultra Short Term Bond ETF (ULST)

Did you miss one of the other Outlook blog posts? You can read the whole 2018 Mid-Year Outlook series here. And don’t forget to stay tuned to SPDR Blog for updates and insights as the year progresses.

1Bloomberg Finance L.P. 6/29/2018
2Bloomberg Finance L.P., as of 5/18/2018, based on 200-day moving average for the MSCI ACWI Index, reaching a difference of 63.71 on 01/26/2018.