4 Reasons for the Return of Market Volatility For Exelon Employees

According to a recent study by Fidelity Investments, market volatility is a top concern for pre-retirees and retirees, with 51% of those surveyed citing market downturns as one of their biggest worries. The study also found that women are more concerned about market volatility than men, with 58% of women citing it as a top concern compared to 44% of men. Additionally, those who are closer to retirement age tend to be more concerned about market volatility than those who are further away from retirement.

1. Inflation Fears

The January employment report (released on February 2) revealed a rise in long-stagnant wage growth, sparking concerns of rising inflation and interest rates.4 Inflation is a rise in general prices that diminishes the purchasing power of money.

The expansion of economic issues was a fiscal policy concern in the United States. Recent tax cuts have prompted concerns that the 'fiscal stimulus' may prove inflationary, which may also lead to an increase in interest rates.

On February 8, the yield on 10-year Treasury bonds soared to 2.88 percent, its highest level in four years.5,6 While higher dividend yields are not necessarily detrimental to stock prices, they do create competition for investors' funds. In other words, some investors may be tempted to invest in bonds rather than equities.

2. Algorithmic Trading

Algorithmic trading is a type of investment that utilizes computers to quickly execute large trades based on predetermined triggers to purchase or sell stocks. It is estimated that algorithmic trading accounts for approximately fifty percent of daily S&P 500 Index activity.7

Numerous conditions can 'push the button' on buy or sell programs, but market observers report that some sell programs were activated when the 10-year Treasury yield approached 3%.8 This may have triggered additional automated strategies, which accelerated the decline and contributed to the subsequent market rally.

3. The End of Easy Money

The decline in prices may also be related to the conclusion of monetary easing. In recent years, the U.S. Federal Reserve (along with other main global central banks) pursued a quantitative easing policy of low interest rates. Quantitative easing occurs when central banks attempt to stimulate economic development by lowering interest rates. In spite of the fact that the Federal Reserve announced the end of quantitative easing in the autumn of last year, the markets may only now be experiencing the effects of the end of the stimulus program.9

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4. Natural Market Cycles

Corrections in the market are a normal component of the investing cycle. There have been 76 corrections of 5 to 10 percent, 26 pullbacks of 10 to 20 percent, eight retreats of 20 to 40 percent, and three drawdowns greater than 40 percent since the end of World War II.10 A long-term perspective can be reassuring because it reminds you that fluctuations have occurred numerous times in the past.

It is impossible to forecast market movements in the coming weeks, though continued volatility is likely. It is essential that the investment portfolios of Exelon employees and retirees reflect their objectives, time horizon, and risk tolerance. Remember why you invested, stay the course, and avoid overreactions.

Conclusion

Market volatility can be compared to the weather, in that it is constantly changing and can be difficult to predict. Just as we check the forecast and prepare accordingly for different weather conditions, investors should regularly review their investment portfolios and make adjustments based on market conditions. While we can't control the weather, we can take steps to protect ourselves and our investments from the impact of market volatility. By staying informed and making well-informed decisions, we can weather the storm and come out stronger on the other side.

CNBC.com, 29 January 2018.
The S&P 500 Composite index represents stocks; it is an unmanaged index considered to be representative of the entire U.S. stock market. The performance of an index is not indicative of the historical performance of a specific investment. Past performance does not guarantee future results. Individuals cannot invest in an index directly. The return and principal value of stock prices will vacillate in response to changes in market conditions. When sold, shares may be worth more or less than their initial price.
Investing entails risk, and it is crucial that Exelon employees and retirees make investment decisions based on their own objectives, time horizon, and risk tolerance. As market conditions alter, returns and principal values of investments will fluctuate. Investments may sell for more or less than their initial cost upon sale. The opinions expressed and materials provided are for informational purposes only and should not be construed as an offer to buy or sell any security. Any corporations or stock indices mentioned are merely for illustrative purposes. It should not be regarded as a solicitation to buy or sell securities.
2 February 2018 Wall Street Journal
It is essential for employees and retirees of the Exelon to remember that the market value of a bond will fluctuate in response to changes in interest rates. Typically, the value of existing bonds decreases as interest rates rise. If an investor sells a bond prior to maturity, its value may be greater or lesser than the initial purchase price. If the issuer does not default, an investor who holds a bond to maturity will receive the interest payments due plus the original principal. Investments with a higher yield target also carry a greater degree of risk.
8 February 2018 issue of The Wall Street Journal
Reuters, September 19, 2017 BBC.com, February 6, 2018 BBC.com, February 6, 2018
United States News and World Report, 5 February 2018