Navigating Recent Market Volatility
As we pull into the last days of summer there has been an uptick in market volatility and a corresponding increase in investor anxiety. You need to look no further to see that the best indicator of volatility, the VIX Index, has increased almost 50% this month. Commonly called the “fear index”, it is often more a measure of investor concerns than actual reflection of reality. However, after a 350-point decline in the Dow Jones and 1.6% loss in the S&P over the last two days, a number of investors are questioning whether this may the beginning of the end of one of the longest bull markets in history. While we don’t have a crystal ball, (wouldn’t that be nice) it is instructive to look at this period of market instability in context.
- This is relatively normal market behavior. August is the worst month of the year in terms of performance. Since 1989, the average return for August has been -1.3%. So far this month, the S&P500 is down 1.5%. Good news, the best two months are ahead of us – November and December have averaged almost 5% over the same period.
- The recent market price action has more of the characteristics associated with a rebalancing of momentum rather than a behavioral “risk-off” sell everything mentality. For example, one of the key measures of market momentum is the number of stocks that trade above their 50-day moving average (50 DMA). That number has dropped from close to 80% in the beginning of July to slightly above 25% now. Yet for the most part, the market is largely unchanged from early July, suggesting that this has been a sectoral rotation rather than a broad-based market event.
- There has been concern voiced that the market indices have been unduly influenced by the large cap FANG stocks (Facebook, Amazon, Netflix, and Google) and that the “real market” is in much worse shape. Comparisons have been made to the 1998-2000 period to illustrate an environment where the broader averages did not really represent what was going on with the market as a whole. While there is no question that large cap technology names have been market leaders this year, their effect on the indexes has been much less than in earlier periods. For 2017 YTD, the average performance of the top 50 names in the S&P has been 13.3%, vs 10.3% for the S&P500 Index. During the 1998-1999 period, the top 50 companies return was 75% vs a market return of only 23%. Narrow market leadership was clearly a concern then, it is not a current concern for this market environment.
- Credit spreads are not moving meaningfully higher…yet. We look at credit as a leading indicator of potential future equity performance. The current spread environment has moved slightly higher off recent historical lows, but have not moved anywhere near a significant level. In 2015, energy spreads widened considerably and the rest of the credit market moved with them – eventually the equity market followed. So far, this year energy credit has widened but has not had a contagious effect on the rest of the high yield market. This is a key relationship that we are watching, but for now it is not giving us any danger signals.
- Finally, as we mentioned in our August Insights, corporate earnings have been strong and bottom line revenues have been picking up. This is the most important metric that drive markets over the long-term, and one of the key measures that we look at to determine whether a market decline is to be characterized as a buying opportunity or a potential change in our investment stance.
We see the recent spate of decline and market volatility as normal market behavior, especially for this time of year. We view this as a buying opportunity and would look to utilize cash if we continue to see declines – our stock program has withheld a significant percentage of cash waiting for such opportunities to emerge.
It is very easy to listen to headline grabbing analysts who pronounce every 1% decline as the beginning of the end. It is unfortunately the product of the 24/7 media environment that we live in today. The reality is that even a blind squirrel finds a nut once in a while and a broken clock is always right twice a day. If and when the next severe market downturn emerges, there will be plenty of people who point to their latest prediction and say, “I told you so”, conveniently ignoring the prior false signals.
We believe that we bring measurable value to our clients in the many services that we offer. One of the services that is often overlooked is our responsibility to interpret events with a consistent investment methodology and provide guidance through changing environments. While it’s not as easily defined as performance or risk measurements, it carries just as much importance. Whether it’s called ‘keeping a steady hand’ or ‘staying the course’ we feel it is our duty to provide this to our clients. Know as we go into the weekend and whatever lies ahead next week, next month or next year we will be there ‘behind the wheel’.
Need Some Help?
If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) advisor, the Rhame & Gorrell Wealth Management team is here to help.
Our experienced Wealth Managers can help you review your financial and tax situation and come up with a custom tax optimization strategy going forward – all at no cost to you!
Feel free to contact us at (832) 789-1100, [email protected], or click one of the buttons below to ask a question or schedule your complimentary strategy session today.
