After the extraordinary market performance of 2017—the least volatile year in decades—followed by three quarters of smooth sailing in 2018, many investors were lulled into a false sense of calm. That’s why the steep drops and sharp rebounds at the end of last year made headlines, and felt unsettling at times.  But as Vanguard CIO Greg Davis explains, overall returns for the S&P 500 were down about 4.5% for 2018, which is not a serious concern in the big picture.  Given the backdrop of a slowing economy, trade tensions, and tightening interest rates, he says it’s no surprise that markets would react with volatility. In fact, CEO Tim Buckley says, these recent corrections are a sign of markets “behaving rationally.”

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Rebecca Katz:  Before we get to 2019, why don’t we start with a little look back at 2018, which just left us. Our first question is from Joria in San Diego, California. And Joria wants to know, “What was the reason for the 2018 market downturn?” And you might want to just give some context on how down the markets were.

Greg Davis: Yes, when you look at the returns in the S&P 500 Index, as an example, they were down about 4.5% for 2018, which is not a big deal in the grand scheme of things. But it felt worse because the first part of the year, the first three-quarters of the year, we saw that the equity markets were actually up quite a bit. And we did see a correction, a couple corrections, and close to a bear market where the S&P dropped by almost 19.8%.

These fears and concerns in the marketplace were driven by concerns about the economy starting to slow down; concerns about trade tension; uncertainty in terms of what’s happening in Washington, D.C., with policy; and then with this all going on, you have a backdrop of Federal Reserve tightening interest rates. So all those things coming together caused some uncertainty in the marketplace, and we saw a bit of a correction.

Tim Buckley: But, Greg, people should be used to that volatility, right? When we look over the longer-term periods, usually a typical year, you’d have 20 days where the market would be up or down 2%. You’d have a 2% swing 20 days of the year. Was it in 2017, how many did we have?

Greg Davis: We had zero.

Rebecca Katz: Wow!

Tim Buckley: Zero, so people have been lulled into this false sense of calm; and when there’s uncertainty in the market, when there’s uncertainty out there, and you’ve mentioned the uncertainty around a government shutdown, a trade war, that should be reflected in the market. So I think the markets were actually behaving rationally.

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