Broker Check

Volatility is normal, especially now

| June 16, 2020
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The return of equity market volatility proved globally dominant during the week as most indices fared the worst downside since March. The FTSE All-World Equity Index closed lower by over -4% while the domestic based Standard & Poor’s (S&P) 500 gave up nearly -5%. Although we strongly caution investors in avoiding specific near-term catalysts for volatility, it appears that the focus on a potential second-wave of COVID-19 cases may have spurred caution. We would argue that such caution resulted in a much-needed pause in equity market upside. The event-driven nature of manually pausing economic activity over the past three months has historically correlated with a faster than expected upside recovery, both in the health of the economy as well as the recovery of equity markets. We have witnessed tremendous gains across equities since the March lows in what has been a truly unprecedented pace. To assume perpetual gains from this point on, however, without the need for measurable pause, is simply unrealistic. The argument that renewed volatility has been caused by unstable COVID-19 containment across the globe is plausible (and largely verifiable). But we must also take into consideration the fact that many investors may have taken gains off the table. Such gains may be a result of added cash to investment portfolios amidst the depths of the bear market, or potentially a result of liquidating bonds (to buy stocks) during the same time frame. As we look ahead, our internal stance remains grounded in favoring equity market participation relative to bonds. Volatility may play a critical role over the next six months, yet it should not be thought of as negative. Volatility uncovers opportunities that allow investment strategies to reallocate assets in a way that may appropriately restructure the strategies’ return profile. Volatility may also allow varying sectors of the market to shift performance leadership, a notion that may aid a well-diversified portfolio over the long-term.

It is important to note that the COVID-19 news cycle last week provided a working example of how investors, and elected leaders, may respond to future waves of the virus. Investors will undoubtedly feel unnerved, but we believe most governments will refrain from shutting down their economies in a similar way that we have experienced since March. Maintained measures of easy monetary policy, alongside fiscal policy, may further curb the economic impact that may result from a potential second wave of COVID-19 cases. The implications to economic recovery under such a scenario may play a more dominant role in economies outside of the United States. As a result, we favor strong global allocations over the next 12-18 months. Such a stance was further bolstered last week when we learned that the Federal Reserve vowed to maintain interest rates near 0% over the foreseeable future. Central banks in other developed nations may likely follow suit, as has been the case over the past 10 years.

Domestic economic releases last week shed further light on the current state of the economy. There appears to be a mild renewed stance on consumer and small business sentiment, yet we are likely months away from a substantial improvement. Data tied to inflationary measures (Consumer Price Index) revealed a measurable lack of price gains on a year-over-year basis and it is something that the Fed commented on extensively. It should be well understood that lack of inflation is not a positive since it provides a disincentive for current consumption. We believe the eventual inflationary discussion may play a critical role in 2-3 years, but it may likely be a positive for investors relative to the notion that most perceive it as negative. The U.S. has failed to see any measure of notable inflation over the past decade. In our view, equity market participation may likely be the best tool to combat such an outcome.

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Edison Byzyka, CFA – Chief Investment Officer

 

Investment advice offered through CX Institutional, a registered investment advisor.

Securities offered through LPL Financial. Member FINRA/SIPC. CX Institutional is a separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

All return data sourced from Bloomberg.  All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. 

Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.

All Indices are unmanaged and may not be invested into directly.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

 

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