What’s on Tap: With Market Volatility Comes Investment Opportunity

With Market Volatility Comes Investment Opportunity.png
  • When Normal Feels Abnormal: Volatility is Back

  • What's Causing Current Market Volatility?

  • Bitcoin Bubble Bursts

  • Looking Ahead to Fed Statement, Likely Rate Hike

After a week of trade- and Brexit-relief gains, stock markets were falling on Friday over concerns that slowing economies in China and Japan would dent global growth in the year ahead. The topsy-turvy activity on Wall Street has persisted for months, though as we’ll discuss below, it’s really nothing out of the ordinary, and has created opportunities for bargain-hunting investors.

For the year through Thursday, the Dow Jones Industrial Average has returned 1.8%, while the broader S&P 500 has gained 1.0%. The MSCI EAFE index, a measure of developed international stock markets, is down 11.2%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.47% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.0% for the year.

When Normal Feels Abnormal: Volatility is Back

Amid Brexit, China trade and Washington turmoil, uncertainty has ratcheted up a notch or two heading into 2019. With that uncertainty, volatility has returned to the stock market. For many investors, we know that the recent moves feel like they’ve spiraled out of control, but in reality, this year has been nothing more than a return to normal—it was the unusually placid 2017 market that deviated from the standard.

There are many ways to measure stock-market volatility, but here we’ll focus on just one: The number of days where the S&P 500 moves by 1% or more (up or down). After all, that’s what an investor who is checking the numbers on a daily basis might be responding to.

Last year, the S&P 500 index moved by 1% or more on just nine trading days—the fewest since 1965. This year’s seen 57 days where the index gained or lost at least 1% in value. That’s about on par with the average year, in which there are 52 such days.

Not dramatic enough for you? Let’s look at 2% moves. How many days did the S&P 500 move 2% in one direction or another in 2017? Zero. Zip. This year we’ve endured 16 days with 2%-or-greater moves, a handful more than the average 11 per annum.

Note: Chart shows number of days the S&P 500 index gained or lost more than 1% or 2% in each calendar year. Source: S&P Dow Jones.

Note: Chart shows number of days the S&P 500 index gained or lost more than 1% or 2% in each calendar year. Source: S&P Dow Jones.

Yes, volatility is back, but it’s not unusual. We know well how frustrating it may be to see the markets and your portfolio sitting below the record highs we hit earlier this year. Unfortunately, that comes with the territory as a stock market investor. We feel the benefits of our investment strategies and partnering with a professional adviser are the disciplined approach they bring to investing in volatile times.

What’s Causing Current Market Volatility?

Before giving up on the stock market though, let’s consider what’s causing all of the stir on Wall Street. The fundamentals—earnings, interest rates and economic data—continue to look pretty good. Inflation remains low. We know that the pace of economic growth is slowing, but is unlikely to flip to contraction any time soon. In the same vein, profits may not grow as quickly as they did in 2018, but we have every reason to believe that they’ll go up in the year ahead. Interest rates are low, which means borrowed money is easily within reach for companies that want to expand, and consumers aren’t swamped by burdensome debt.

If it’s not the fundamentals, then what is it?

One theory: It’s hard for investors, traders and business owners to operate when they are uncertain about what’s over the horizon. If you run a company that does any business in the U.K., it’s tough to invest and plan ahead when you don’t know how Brexit will play out. If your business touches China in some way, whether as part of your supply chain or as an end market, there’s no doubt that whether a trade deal or a protracted trade war is the end result of today’s machinations, it will have an impact on your bottom line.

Trade tariffs and Brexit are causing headaches because the rules may be rewritten in the months ahead. Or questions could linger for much longer.

Those are simply the biggest current unknowns, having replaced others that have either been resolved or cast aside as unimportant or irrelevant in the grand scheme of things. Remember the worries about a “double-dip” recession in 2010? Probably not, since 2010 was merely a blip in the long-run gains earned in what will soon be a decade-long bull market.

The silver lining to declines on unknowns rather than fundamentals? Bargain shopping. Who doesn’t enjoy splurging on an additional item they find on sale, particularly during the holiday shopping season?

Curiously, the universal appeal of bargains doesn’t seem to apply to the stock market. Stocks are one of the few items that people prefer to buy when they are priced high rather than priced low. Tuck this thought away while you’re shopping the sales for good deals on holiday gifts: The bargains that may look like coal to the uninformed eye today may end up shining like a diamond a few years down the road.

Bitcoin Bubble Bursts

Speaking of lower prices, albeit ones you’ll find in the “damaged” bin for a good reason, we first wrote about bitcoin in this space on December 8, 2017 after the iconic cryptocurrency had skyrocketed to $14,843 per coin in a couple of months. Our take: We believe bitcoin is in a manic phase driven by speculation… a broader belief that buying bitcoin is a path to easy riches.

One month later, with bitcoin at $17,000, we shared a special report from Adviser Investments (our parent company), Betting on Bitcoin: Investment or Gamble, in which the research team looked at the basics of bitcoin and the compelling blockchain technology behind it. They wrote that bitcoin is still a relatively small market, its comeuppance will not cause a broad market tsunami or economic disaster. But it will be extremely painful for those who were unable to resist the siren call.

Take a look at the chart to see what’s happened to bitcoin in the year since our initial discussion.

Note: Chart shows daily price of bitcoin from 12/12/2017 to 12/12/2018. Source: YCharts.

Note: Chart shows daily price of bitcoin from 12/12/2017 to 12/12/2018. Source: YCharts.

We’re not trying to toot our own horn, and are genuinely sympathetic to people who lost money they couldn’t afford to lose betting on bitcoin; there are some true horror stories out there. A year later—and “worth” 79% less—bitcoin is a reminder that, at Braver Capital Management, we don’t jump on the bandwagon of the latest get-rich-quick investment fad.

Since our inception, we’ve been dedicated to disciplined and thorough stock market analysis. This hard-nosed research underpins every decision we make about the investment strategies we manage. Bitcoin simply didn’t fit the bill. And now it may not pay the bills either.

Looking Ahead to Fed Statement, Likely Rate Hike

Next week, all eyes will be on the Federal Reserve. When the Fed’s two-day meeting concludes Wednesday afternoon, policymakers will release a statement, their projection for the months ahead and Chair Jerome Powell will hold a press conference. We, and most market participants, expect the Fed will hike the fed funds rate for the fourth time this year to a range of 2.25%–2.50% from the current 2.00%–2.25%.

Next week we’ll also examine data on manufacturing, housing construction, existing home sales, leading economic indicators, durable goods orders, inflation and personal spending and savings, as well as the final revision to third-quarter economic growth.  

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, December 14, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. 

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. 

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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