Market Volatility Addressed

As we finish off a choppy week in the market, some investors and the media may start to read too much into the volatility. While I know as investors, we all do very well in the medium to long-term with investing, I still focus on reducing short-term volatility as much as possible. There is more emotion in the stock market today than there was 10 years ago, and it is easier for even the best investors to act on an emotional feeling by accident.

Let’s look at the scorecard.

1) After the March lows this year and our subsequent buying of stocks across portfolio’s during the springtime, portfolios have felt a lot of recovery. As I have spoken with many of you, based on a surprise shut down of the global economy, I would have expected to need 12 months to get portfolios back on track. It took 5-6 months. 

2) The 2016 American election does not look to dissimilar to this one. Every election is unique, but a lot of the same discontent elements are still at play down south. It's important to note that stocks bottomed on the Friday before the 2016 election, with the rally starting on the Monday/Tuesday. It lasted into 2018, where it paused a couple of times and then reasserted itself in 2019. Investors did very well.

3) The market is hedging hard heading into this election. The options market is where the “big money” investors attempt to immunize their portfolios from risk. As November options have become very expensive, it is clear that a lot of the bigger players have bought more insurance than they might need. The more they attempt to protect their positions, the less of a financial event this election becomes.

4) While the U.S. presidential election is a prescribed event, the timing is certainly unfortunate. The stock market wants governments and central banks exclusively focused on protecting the economy and jobs. It is very clear with the lack of movement on the stimulus package between the Democrats and Republican’s, politicking has taken centre stage and therefore created some uncertainty as to the timing and magnitude of that stimulus. 

5) Stock markets do not like uncertainty. As we entered the month of September, we witnessed the high-flying stocks take a breath and some of that profit-taking move into other industries like financials. We call that market breadth and is an important sign of a healthy stock market. When it became clear that stimulus negotiations would not be settled until after the election and that COVID cases rising would impose further focused restrictions on parts of the global economy the market went into pause mode and in my opinion is now just trading off daily noise. As history has demonstrated very clearly; once economic policy is back in focus, the market will reassert itself. 

While the U.S. has taken its eye off the ball for the moment, it is not surprising given the focus on the election next week. It's important to remember that governments globally have demonstrated a focused support for job #1 this year; protecting the economy, jobs and the health of their citizens. The spike up in COVID cases globally is certainly not ideal and not being ignored by the stock market either. While it may be occurring with some investors to see this spike up as a much darker event, the result will just be a bit slower economic growth next year. This invites in the strong possibility of additional stimulus from what is currently expected and additional support for the economy.

In March of this year, Federal Reserve Chairman Jerome Powell was asked if the “Fed” could run out of options to support the economy. His answer would be an answer that all policy decision-makers could give. “We’re not going to run out of ammunition, that doesn’t happen.” Every investor would want to reflect on those words if you start to feel like there was not light at the end of this tunnel. We don’t make investment decisions that go counter to government and central bank policy. They print the money and they control the money. Don’t fight the Fed is something you learn very early on in my role if you want to make clients money.

As we are closing in on the finish line of 2020, many people will probably not be sad to see the year in the rear-view mirror. I am someone who typically sees the glass as half full (except for the fact that this is the first year in A LONG TIME, that I will not be out trick or treating and I am not dealing with it very well!) it is not hard for me to make the case that our institutions, our processes, our IT departments (unsung hero’s) and us as people were very challenged this year and as is always the case, we did rise to the challenge. It's certainly not perfect, nor does it need to be, but because of the creativity, imagination and boldness of decision-makers we are in a lot better spot then I would have expected. While the short-term noise is still quite loud, from the data I track and readings I bury myself in, we are setting up for a very strong 2021. The time for “excitement” to come back in is just around the corner.