One of the most common questions I’ve received of late is “Should I go ahead and get out of the stock market?” Given the spike in volatility that began in earnest in October and has continued thru the beginning of December with both dips and rebounds, this question is not at all surprising. As of this writing, the DOW is off 750 points intraday (after trading up over 500 points intraday yesterday) – that’s enough to cause even the most complacent of investors heartburn. When you add to this volatility the fact that the equities market and the economy has been operating at a level of relative tranquility, its understandable that investor response is exacerbated.
What is causing this rapid rise in volatility? In short, uncertainty. Uncertainty at both the corporate and investor level due to lack of visibility on interest rates and the possible impact of tariffs. Brexit, riots in France over tax increases, and Mueller’s tightening of his grip on President Trump do, of course, create a bit of blip, but at this point they pale to the impact of interest rates and tariffs.
Interest Rates: Fed Chairman Powell effectively, and somewhat surprisingly, put investors’ minds at ease regarding interest rates last week when he said (yes actually said, not hinted as most Fed Chairmen have done in the past) that he believes rates are normalizing – which creates visibility for corporations and thus visibility for investors in those corporations. The equities markets loved this and regained most (if not all in some sectors) of the October decline.
Tariffs: Further, by taking interest rate fears off the table, the Fed Chair put the onus squarely on President Trump to address the tariff issue – which we were under the impression, based on comments from the Trump administration (and media machine) Trump had done at least temporarily via a verbal agreement with China’s Xi. The belief in this temporary solution drove the markets upward yesterday, only to drop precipitously today when we hear that that “agreement” is more of a “he said, Xi said” (that’s bad, I know…).
If you, as an investor in the equities markets, had given in to the fear trade (instead of sticking to your plan) and sold out in October, you would have missed the rebound at the end of November. I can’t pretend to have tomorrow’s newspaper, but I can say with confidence that this rough and tumble, media fueled, globalized economy and highly automated market will continue along this path of volatility. It’s periods such as this that reward patience and often severely punish emotional decisions. Don’t take it from me; here is a quote from the one and only Oracle of Omaha himself: “Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more change to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.”
If you feel your emotions getting the best of you and need to review your investment allocation or financial plan in general, give us a call, that’s what we’re here for. In the meantime, keep looking forward!