Don’t Let Market Volatility Become Your Volatility
So far this year we’ve seen volatility in the stock market increase. After a prolonged period of no price moves of 1% or more in either direction, like a Netflix watcher binging on a new series, we saw bunches of these days clustered over the last couple of weeks.
As usual, there were plenty of reasons for large moves: the new virus, a trade deal between the U.S. and China, the ups and downs of the impeachment acquittal process. Those that follow the headlines (illustrated on the following chart of the volatility-based VIX, or “fear index”), like this year’s groundhog, finally started to have their day in the sun again.
When we have these bouts of volatility, reflecting days of fear and days of elation, it is important to remember, “The market’s volatility is not your volatility!” These are the words of Jay Mooreland, the founder of the Behavioral Finance Network.
What Jay meant when he said “The market’s volatility is not your volatility!” was to warn investors against identifying their own investing with what they see, hear, and read in the media about the general activity of the financial markets. Whether you are an investor in stocks, bonds, or gold; have a diversified portfolio in all three; or have most of your portfolio invested in dynamically risk-managed strategies, it is important to realize that the experience of the most-watched indexes is not necessarily yours … unless you let it be.
When the market goes on a volatility binge, stick to your investment plan!
We know that the market moves relentlessly and that it can be trending up, down, or sideways in whatever period we want to examine. But if you are an investor working with a financial adviser, those market moves have already been accounted for in the portfolio plan developed for you.
The plan can be as simple as being diversified in asset classes or can be as comprehensive as a turnkey, automated portfolio of dynamically risk-managed strategies. In the former case, your adviser is relying on just one defensive tool, diversification, for volatility protection. In the latter case, literally dozens of protective measures are being enlisted on your behalf in securing the same goal.
The important message, though, is that investors working with a financial adviser have a plan for dealing with volatility when the market binges on it.
One way that you can overindulge in the effects of the market’s volatility is to watch your account values too frequently. It’s true that if you are invested in a passive asset-allocation portfolio, it might be looked at only once every quarter—and then the likely move is a hesitant tweak of the mixture. In contrast, dynamic portfolios are monitored and altered frequently, sometimes even daily. Either way, the amount of management is related to the portfolio plan developed by you and your adviser.
In other words, you already have a plan for these volatile days! There is no reason to micromanage the manager. Behavioral scientists tell us that reviewing your statements even quarterly is too often, let alone daily. These same experts report that the ideal reviewing frequency is yearly.
It follows that the other way that investors can become a victim of volatility is to abandon the plan that their financial advisers have laid out for them. Most portfolio plans establish a goal for the investor.
The strategy chosen for the portfolio to follow has been determined by your financial professional, with your considerable input, as the path to follow to achieve that goal. Volatility can only upset that plan if you allow it to cause you to quit the plan and leave the path your adviser has worked out for you, allowing yourself to be lost in the tall weeds by the side of that road.
The major stock market indexes finished up last week. The Dow Jones Industrial Average gained 3.0%, the S&P 500 Stock Index rose 3.2%, the NASDAQ Composite was up 4.0%, and the Russell 2000 small-capitalization index advanced 2.6%. The 10-year Treasury bond yield rose 7 basis points to 1.58%, sending bonds a bit lower. Last week spot gold closed at $1,570.44 per ounce, down $18.72, or -1.2%.
Stocks jumped higher last week and returned to new all-time high territory. We seem to be in a Goldilocks period where many of the past investor concerns have been diminished. An end to the impeachment inquiry, the Chinese trade deal, and improving economic numbers all worked to ease investor fears and send stocks higher.
The latest report on the growth rate of incidences and deaths from the coronavirus indicates both continue to fall. If these reports are accurate, they may help quell fears.
On the economic front, reports were numerous last week. The great majority of them outperformed economist expectations. As I mentioned last week, the ISM Manufacturing reading was especially encouraging as it returned to positive territory and jumped the most on a monthly basis since May 2009! The service industry report the next day was even more positive.
The jobs report last week also helped quash investor recession fears as the number of new jobs was well over the estimated numbers. While the unemployment rate moved slightly higher, wage growth, especially at the low- and middle-income levels, was very strong and labor participation rates continued to increase as more people have been drawn into a surging labor market.
The number of unemployment claims has moved down again and is rivaling the 40-year low set last spring. And the number of available jobs being reported was again greater than the number of people unemployed by a wide margin.
Earnings reports for the fourth quarter also continued to exceed expectations, as has sales growth. Both are substantially above last year’s other quarterly reports. Somewhat worrisome is the fact that individual reporting company stocks have not been responding as strongly to the positive earnings report as is normally the case.
With inflation well below targets, it seems likely that the Federal Reserve will not take any tightening measures in the near future. In addition, the Fed’s stepped-up Open Market bond purchase continues to add liquidity to the financial markets. This is positive for bonds.
Year to date, bonds have gained over 6.7% at the long end of the maturity range. Gold has notched a 3.4% return, while the S&P for all its new highs has managed a 3.2% gain year to date.
Last week’s new highs in the S&P 500 were matched by a new high among its breadth measures, which is a positive sign for a continuation of the index’s move higher. However, that has not been the case for the NASDAQ and Russell 2000 indexes. This could have a dampening effect on a rally, or they may simply catch up.
Sentiment measures continue to move higher as stock prices improve. Although just a week ago many stock indexes were oversold, the surge in equities over the week has brought us closer to overbought territory.
I am currently neutral on stocks for the short term and bullish for the long term.
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