Earlier this week the investment committee at Surevest sent out a note to our clients. The goal was to answer questions that investors had considering the increase in market volatility and decrease in price of the major U.S. indices.
The media outlets thrive when things begin to move in the market because they make for good headlines. Earlier this year, the talk in the news was that by some conventional metrics, the S&P 500 had entered into the longest bull market in history. Now that things are moving in the opposite direction, we see headlines like the one posted in a major media outlet, “Roller Coaster Ride: Bears taking control of the S&P 500…”
These type of swings in how the media reports the financial news can confuse even the most sophisticated investors. It is important to differentiate between “market noise” and “fundamental signals.” To the Surevest investment committee, noise is information that comes into the market that is not material, does not affect valuations or does not affect how securities are priced.
An example is the recent spike in the VIX, known as “The Fear Index.” Last week the VIX spiked, but there was no news; everything that was known last week was already previously known in the market. Yet the media scrambled to find a reason and pointed to trade tariffs and the mid-term elections. It is true that the VIX has moved from levels in the low teens, but when seen in the right perspective, the spike is not abnormal. As can be seen in the chart below, over the last 18 years, a spike in the VIX is expected.
A Fundamental signal is data that has reliably shown to be a good indicator of stock prices in the long run. An example is valuations. As can be seen in the chart below, over a 5-year period, the forward price-to-earnings on the S&P 500 has been a reliable indicator of future prices.
At Surevest, we use a disciplined investment approach that is anchored on three main pillars:
- Dynamic Investment Process: The investment environment is not the same across time.
- Data Driven Approach: We must use supporting evidence that is statistically significant.
- Rules-based Decision-making Process: Minimizes emotion and cognitive biases in our investment decisions.
Over the next three market outlooks, we will be addressing each pillar in more detail. We will also include relevant and timely data to illustrate how the investment committee navigates through the changing investment environment.