Broker Check

What (or Who) Drives Market Volatility?

| March 25, 2020
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One word comes to mind when describing the stock market this past month: Volatile.

The new normal in this market consists of big down days followed by a few big up days, rising and falling in percentages and points that appear to be typos at first glance. We've entered our first bear market since 2009 in dramatic fashion.

While these market swings can be scary for all of us, it's important to identify what (or more specifically, who) drives market volatility, because it matters.

All market participants, from long-term investors to short-term traders, have different investment time horizons. Our firm's clients, for example, look to grow their money over years (and for younger clients, decades) in pursuit of their financial goals.

Traders, on the other hand, have a much shorter time horizon and seek a return on their investment in weeks/days/hours/minutes. As a result, day-to-day events and the hourly news cycle are important to traders who need to beat other short-term players to the punch. Their buy and sell transactions move the market.

Long-term investors feel the shock waves of these short-term market moves from participants who have a very different time horizon than they do. This forces us to question "Should I be doing something too?", never realizing the apples-to-oranges comparison. 

Consider the time horizon for when you need the money from your investment accounts. Is it days, weeks, or months? Or is it years, when the markets will likely recover and hopefully continue to move upward, as they have throughout history? Keep this in mind before letting market fluctuations affect your long-term plan, especially in these volatile times.

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