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Oct 9, 2018

Anxiety Is Peaking as Volatility Creeps In: Article I Investopedia

investopedia.com

Caleb Silver



Volatility is back, rearing its maniacal head like a crazed jack-o'-lantern in late October. It's a few weeks early, but it's here and it's angry.
We see it in the VIX (Volatility Index), which spiked to a four-month high on Monday before settling down in the late afternoon. We see it in our own Investopedia Anxiety Index, which tracks 13 keywords associated with fear-based terms across the markets, the economy and debt and credit markets. It is shrieking like a 2-year-old who dropped his ice cream cone, as our readers are looking up definitions, tutorials and articles about corrections, sell-offs, and volatility in droves. Traffic to our short-selling definition and tutorial are up 500% and 200%, respectively, since Friday. We are a little freaked out... but let's get some perspective.
We are awash in headlines about stocks selling off or poised to sell-off due to fears of higher interest rates, and that might be true. But keep these things in mind:
  • Interest rates are still very low by historical measures. We’ve had our heads in the Fed’s punch bowl for so long we forgot what a "normal" level of interest rates feels like in a healthy economy. Look at the St. Louis Fed's chart of the Federal Funds Rate since 1954, and you'll be shocked at how low rates are relative to other periods in U.S. history, and our economy is strong as a bull right now.
  • Even when interest rates rise it does not automatically mean that stocks will fall. Far from it. The 10-year Treasury yield has increased 1.87% from an all-time low of 1.36% to 3.23% as of last week. What have stocks done since 10-year yields hit lows on July 8, 2016? Glad you asked:
             Nasdaq 100: +63.94%
             Russell 2000: +41.48%
             S&P 500: +35%
  • U.S. markets are mostly higher so far this year, and not many people thought that would be the case. To be sure, we still have 56 trading days left in the year and a lot can happen. But, even if the S&P 500 fell 10%, we’d only be 3% lower than where we started the year. Could markets fall more than 10%? Absolutely. Will they? If we knew that, we'd be offering you a short ETF right now.
A few things have changed since the summer wind was blowing in and making us feel so buff.
  • Tech stocks have lost their swagger. The QQQ Tech ETF is down about 2% from late August highs, mostly dragged down by Facebook (FB) and Google (GOOGL), the bookends of the FAANG club. Those two are having some "privacy problems" and are getting a time out.
  • There is a divergence in the S&P 500 among large and small cap stocks wherein the little guys underperforming the big guys by a pretty wide margin, according to Bespoke Investments. The bottom 150 stocks by market cap are down 4.25%, while the largest 150 are down less than 0.5%. Smaller stocks powered the rally throughout the first half of the year, but they have lost their steam. When large caps like Facebook and Google fall, everyone feels it given their weight.
  • Earnings growth was supposed to be great: 19.2% on average for S&P 500 companies, which would have been the highest since Q1'11, according to FactSet. But three quarters of the companies issuing earnings guidance have actually guided lower for the final quarter of the year. Either they are sand-bagging or they fear a slowdown due to tariffs, higher wages or higher interest rates.
  • Oil prices are rising and we have not had the double whammy of rising oil and interest rates at the same time in quite awhile.
Why it Matters: Fear is a primitive instinct that causes us to do irrational things sometimes. Our "fight or flight" instinct is irrepressible. But as investors and market participants we need to muzzle it. The only way to do that is to have a real plan and strategy for investing that takes into account our risk tolerance and our long-term goals. If you think you can time the bottom or know when stocks will break out, you are probably not reading this. Most of us need a disciplined plan to handle market volatility for times like these. If you need help making one or just want extra guidance from a certified professional, we have about 40,000 we’d like you to meet.
What’s Next: Earnings season is barely underway, and we’ll hear from the big banks on Friday. They will tell us about lending activity, trading activity and the real impact of rising rates on their business and the global consumer. Financial stocks have been loving the rising rate environment, so business should be good -- but pay attention to what they say about us, the consumer. We’re anxious… we know. Take a few deep breaths and a hard look at your asset allocation to make sure you are not over-exposed if our anxiety gets the best of us.