• U.S. equity markets enjoyed a relatively steady rise throughout 2017 and into early 2018. The S&P 500 Index returned nearly 22% last year and largely continued its momentum in the first weeks of this year. In January 2018, for example, U.S. stocks returned approximately 5.7%, their highest monthly return in nearly two years.2
  • Investor sentiment steadily moved higher along with the stock market. One measure of sentiment, the ratio of bullish to bearish investors, reached 5.24 in late January, its highest point in more than two decades.19 However, it is precisely these types of market environments that may lead to periods of significantly higher volatility.
  • Amid their enthusiasm, for example, investors poured more than $17 billion into U.S. equity mutual funds for the week ended January 24.3 It was the second-largest weekly inflow into U.S. equity mutual funds since November 2016, just after the U.S. presidential elections, and was global stocks’ sixth-largest inflow ever.3,20
  • Just two weeks after the significant January inflow, investors pulled nearly twice as much back out of U.S. equity mutual funds, $28 billion, as the U.S. equity market was on its way toward a brief correction.2,3 As the chart highlights, investors are often poor market timers.
  • Emotions, or sentiment, can often get in the way of investors’ ability to make the best long-term investment decisions. As we have seen, volatility can spike very quickly and without notice, so it is critically important that investors become proactive and prepare for it rather than react after it hits.

1 Federal Reserve Bank of St. Louis, 10-year yield, http://bit.ly/29ecBfp.
2 Federal Reserve Bank of St. Louis, S&P 500, http://bit.ly/2d3pN5b.
3 Thomson Reuters Lipper.
4 ICE BofAML U.S. High Yield Master II Index.
5 ICE BofAML U.S. High Yield BB Rated Index.
6 ICE BofAML U.S. High Yield B Rated Index.
7 ICE BofAML U.S. High Yield CCC & Lower Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 ICE BofAML U.S. Corporate Master Index.
10 ICE BofAML U.S. 10-year Treasury Index.
11 U.S. Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
12 U.S. Bureau of Labor Statistics, http://bit.ly/2jKLr2f.
13 U.S. Federal Reserve, http://bit.ly/29y0IjN.
14 Bloomberg, based on CME data.
15 Dow Jones Newswires, http://bit.ly/2Cq56g4.
16 Federal Reserve Bank of St. Louis, 2-year yield, http://bit.ly/2anGvQ0.
17 Federal Reserve Bank of St. Louis, 30-year yield, http://bit.ly/29ecFfc.
18 Federal Reserve Bank of St. Louis, 5-year/5-year forward, http://bit.ly/2syTZBG.
19 Yardeni Research, based on data from Investors Intelligence (figure 9), http://bit.ly/2tK0xxU.
20 Bloomberg, https://bloom.bg/2Bd2f9Z.

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