It’s going to be ok.
Despite 2018’s roaring start to the year (US markets were up ~6% in one month alone, returns you would be expecting throughout the course of an entire year), headlines over the last week have exaggerated the volatility as stock markets slipped, surged, plummeted, recovered, crashed, bounced, corrected and bounced back again.
And even though our New Year’s gains have been erased, the S&P is still up 11.8% over 12 months and 22% since Donald Trump’s election.
So, what’s causing all of the noise?
The US jobs report released a week ago today indicated that wage inflation is picking up – this has led investors to believe that the US Federal Reserve is going to raise rates more times / faster in 2018. In other words, investors are worried that growth may be too strong.
This might seem like a strange concern, especially after a decade of slow-but-steady economic expansion coming out of the recession. But global growth — along with a shred of evidence that Americans are starting to get wage increases — started a broad sell-off that has spread around the world.
Why? Here’s how the logic goes:
Read more about inflation and why the stock market is worried about it here.
Some are also blaming the volatility on the highly leveraged, short positions in the Low Volatility ETF’s. Big investors and hedge funds were “shorting volatility”, (the CBOE Volatility Index, known as the VIX) and are being forced to sell stocks to pay back their margin calls, which begets more selling and means more margin calls, rinse, repeat.
Markets are also driven by perception as much as anything else, and even the anticipation of the status quo being disrupted can rattle investors. The other side of the story sounds much more appealing and could soon come into focus: fatter paychecks can put more money in the pockets of shoppers, and potentially increase profits for companies riding the economic wave. But for the moment, markets have been plagued by volatility, and how long it will last remains to be seen.
The silver lining
Ray Dalio, the celebrated U.S. investor, called the gyrations this past week “just minor corrections in the scope of things” and pointed to the piles of cash sitting on the sidelines. The confidence of that cash is now in the hands of new Fed Chairman, Jay Powell, whose resolve will be tested in the coming weeks. But at his swearing-in, the new Fed chair stuck to his view that the economy is firing on all cylinders, rates will continue to rise and “our financial system is now far stronger and more resilient than it was before the financial crisis.”
Corrections are like vegetables - they don't always taste good, but they can be good for you. Whether this volatility continues for days or weeks to come is of course unknowable. We suspect that the volatility will likely continue in both directions over the next several months, in a more normal long-term pattern compared to the low volatility of the past two years. This could take some getting used to...
In an effort to cope with it all, this is a good time to ask yourself WHO you are in the market? Are you an investor? Or a Trader?
If you are a trader – then the wild ride of volatility would reasonably excite and stress you out.
But for the vast majority of my longer-term investor clients, this week has been part of the long-awaited correction – an opportunity to either do nothing or to top up good quality positions while they are on sale.
Always remember your asset allocation, diversification and patience are they key to your long-term success. And while we are far from bear market territory, let me quote Warren Buffet to remind us all that “bear markets are when stocks return to their rightful owners” – and make no mistake that you are the rightful owner of your portfolio (in other words, don’t get spooked into selling your shares to someone else out of fear).
As always, my team and I will continue to monitor the changing macro environment and potential implications for our valued client’s investment portfolios – in addition to making sure that their wealth management plan is on track.
If you have any questions as to how your current investment portfolio is positioned, or if would just like to chat further on the topic, please do not hesitate to call me directly.
Now you are in-the-know with Word on the Street.
Enjoy your weekend,