Recovery from surgery keeps me from running, and that is torture. The change in my routine, not the surgery.
The stock market began its first correction in four years about 100 days ago. The volatility since that correction seems like torture. Moreover, the first days of 2016 rank amongst the worst starts to a calendar year in the history of the index.
We became accustomed to low levels of volatility, with 1% daily moves on the S&P 500 Index happening less frequently than the typical once a week. This lack of significant moves continued for the three years before the correction. Since the correction, the daily index movements of this size occurred more than 40% of the time. In other words, big moves went from about once every other week to twice every week.
Another index called the VIX, estimates expected volatility for the next 30 days. It increased from an average of 13.9 to 20.0, a 40% increase in fear from the 100 days before to the following 100 days.
Volatility increases when the future is more unknown than normal. Well, no one knows the future, but when there are disruptions to the “status quo”, especially surrounding economic issues, investors and, therefore, the markets become more volatile.
As I write this piece, I see some fundamental uncertainties with short-run resolutions likely:
– When will the laws of supply and demand kick in and high-cost oil producers stop producing oil?
– Will China’s announced slowdown be too much for the global economy to withstand, pushing it into a global recession?
– Can world leaders, including central bankers and politicians, avoid reacting to every soundbite and viral tweet attempting to micromanage the situation?
Until these issues are resolved (or displaced by a new crisis), the emotions and noise surrounding them strangle common sense and keep negative pressures on prices.
Of genuine concern in the longer run, there some issues, and where necessary, we are making adjustments to our investment models.
– Is America’s growth limited to the 2% per year range we’ve experienced for the past seven years, or can that return to the pre-recession 4% range?
– Can Europe, slightly larger than the US economy, overcome its unique structural challenges and begin to experience the long periods of economic expansion that started in American during the Reagan administration?
– The face of global terrorism is changing, and frankly, my confidence in political leaders’ wisdom and their resolve to protect us is waning.
The surgery was a minor one, removal of a bone spur from my foot which caused discomfort during the first three miles of my runs. However, I believe that the short-term pains will make me a stronger runner in the long-run future. Similarly, I think the disruptions we are currently experiencing in the markets will create future possibilities for those who endure the short term “torture”.
Contact us if you need someone to help pace you through these difficult times.
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