March 9, 2018

Vol Is Here To Stay

“You will never fully convince someone that he is wrong, only reality can do that.” 
                                                                                                                                               -N. Taleb

The mystifying behavior of the capital markets is nothing new, at least over the span of my own involvement. However the current scenario generates all the more concern because how quickly information is passed via the internet. And if that’s not enough, much of that information is neither edited nor confirmed but nonetheless is embraced by media and subjected to literal analysis. So what happened to cause the volatility last month that seems to have evaporated this month? Nothing, but this is what happened that was ample evidence to lay blame.

Last month gave the broad indexes their first meaningful correction in exactly 2 years. While no specific piece of legislation, nor economic surprise caused the volatility the outcome was met with surprising order. The gap down of nearly 10% brought the broad indexes to flat on the year only giving up the gains which in my opinion are too often, too dependent on earnings results. 10% is a respectable correction by any standard, but it is not the same at 1000 points on the Dow Jones, blown out of proportion by pundits while representing barely 2% of the index. Nonetheless their goal was met and volatility spiked and within the unruly market active sellers were met with equally eager buyers and although some sense of stability was in the outcome the internet was primed for the next piece of earth shattering news. Should the market be volatile on this subject? Sure.

China Trade
By the end of last week the new poster child was the administration placing tariffs on steel and aluminum imports. I was somewhat surprised that so few pundits recalled that protectionism is nothing new to the US and has been even more frequently sourced by Europe and a handful of Asia Pacific economies. The difference here is that this administration likes to advertise its decisions with a sense of enthusiasm that many (including myself) don’t share. That aside, since the end of the last World War the US has been a leader in providing access to its rapidly expanding post war economy. In fact much globalization can be traced to the contributions the US has made sharing its economy to help nurture growing economies abroad. China was one of them and by the time they were provided access into the World Trade Organization the tag “Emerging” meant little in the grand scope. But that hasn’t stopped them from initiating protectionist motives of their own. Challenging the intellectual property rights of tech companies, coopting manufacture industry products and hindering the ability of foreign companies eager to set up in China 20 years ago to expand without compromise. All, in my opinion, begs for a new trade arrangement and maybe, although not the best strategy, this recent move by the administration might trigger some action. Should the market be volatile on this subject? Sure.

This week Job growth outpaced expectations by rising over 300k in the month of February, usually a seasonally less robust month. More recently Consumer Sentiment and Manufacturing data was released and both were near their highest since 2004. This is consistent with recent activity that still has the economy on track for a growth rate at or near 3% for the near term. This is supported by chatter from various central bankers and other voting members of the Federal Reserve who suggested that as data continues to show strength so too will the Fed continue to respond (i.e. higher rates). Should the market be volatile on this subject? Sure.

The Message
Volatility is not by itself a reason to buy the market. Often the unruliness can make the environment feel worse than it actually is. But likewise the opening for buying assets at lower prices than they were 3 months ago is compelling, so for now the volatility is a battle between a market that is craving to be understood and an investing public that is craving to spend some cash. The former acting in accordance to the latter?  Why not, markets are generally grounded in fact, investors are more compartmentalized. Should the market be volatile on this subject? Definitely.