An Update on Market Volatility
Market volatility continues in the U.S. equity markets this week. The broader indexes saw a spike higher on Monday after optimism on a potential U.S. and China trade deal, but all the gains were given up on Tuesday when the market lost hope the dinner between President Trump and President Xi Jinping would lead to a productive negotiation between the two nations.
The markets were closed on Wednesday to honor the life and passing of President George H.W. Bush, but on Thursday the selloff continued in the market only to recoup most of the losses with a rally going into the close.
So, what’s going on? Robert Luna, chief executive officer & investment strategist at Surevest, shares his insights on what happened this week. “The market volatility this week has been caused by several factors,” said Robert. “There is a lot of uncertainty around the trade talks between the U.S. and China, plus the Federal Reserve is meeting in a couple of weeks and with the recent talks from chairman Powell and other Fed members, the markets are not sure what to make of their new tone.” Robert also mentioned that there were technical patterns that led to the sell off on Tuesday with the S&P 500 trading below its 200-day average, which is seen as a bearish signal. Robert continued, “This break in the technical pattern has caused program trading, automated computer algorithms, to accelerate the selling in the markets.”
The markets are a discount and balancing mechanism that overshoot on the upside and downside until it finds an equilibrium. This process is accentuated when there is high uncertainty, much like what we observed this week. There is nothing abnormal of what we are experiencing; the markets move in cycles and market decreases like what we are seeing now are part of investing. However, we understand that a few of our clients may become concerned with a spike in volatility, especially after coming out of a low volatility year like was 2017.
A Note Directly from Robert Luna
News and headlines while scary, are only important if you’re a trader. As a trader your time frame for full liquidity is between minutes and days; what moves the market in the short run is news and emotion. With today’s trading being dominated by computers, human beings will continue to experience increased frustration and are best to avoid stepping into that arena.
As investors however, if you are able to control your emotions, this noise actually creates opportunities. As an investor, you do not need to cash in your portfolio in minutes or days because your capital is managed to fund long term goals, such as college, weddings, thirty to forty year retirements etc. Trying to predict minute by minute moves is a fool’s game and nobody has the answer—no matter how much conviction they have on television. I can say this because I turned down 2 major media outlets this week that wanted my “view on the volatility.” There is no value in that opinion.
Buy and sell decisions should be made in the context of valuations. True value is only present in the market when there is uncertainty. When everyone feels good because the news is great, you must pay full price. As an investor if you sell every time the news is bad, you have committed to a lifetime of buying high and selling low. You should get out of the market and not re-enter if that is your plan.
The only advantage we have as investors today is the ability to control our emotions. You must be able to use greed as a sell signal and fear as a time to look for opportunity. In order to do that at Surevest we do two primary things for our clients.
- We make buy and sell decisions based on data, such as valuations, and your personal plan. Not on emotion.
- We segment assets in time blocks. This means that assets you need in 4-5 years to fund a goal are not reliant on stocks. Equities, real estate etc. are assets that are expected to outperform assets like cash and CD’s over time, but in the short run you cannot expect them to be an ATM.
If your assets are segmented according to your personal life goals, then when everyone else is panicking you are to able capitalize on that fear. In other words, buy low and sell high. This all sounds simple, but most investors lack a formal plan and end up making the same mistakes repeatedly.
This is the importance of tying your investing to your personal plan. At times like this it’s best to review your plan and check with your advisor if shifts are warranted. If your plan needs to be updated, it should be based on your goals changing not because there is uncertainties over foreign trade.
The U.S. markets are expected to be higher in twenty-four to thirty-six months from now, but I have no idea what the new scary headline will be at that time or what news will be released that frighten investors.
We will continue to navigate this environment for you and keep you updated. This includes both managing risk, but equally important being opportunistic when the emotion of others create bargains.
We appreciate the opportunities to help navigate these markets for you and keep you on track to meet your goal. As always, please reach out to your personal advisor with any questions.