Volatility Spike and the Election
UPDATE: As the election nears, market volatility has been on the rise after a long period of quiet trading, but the direction of the overall market is still uncertain. Some short-term support levels were broken on the major indexes last week, but today’s bounce is bringing the markets back above those levels. However, the overall trend continues to be more of a correction than an uptrend.
With market expectations for the status quo of Democrats in the White House and Republicans retaining Congress, we will be watching the election closely for any deviation from this (or any other electoral disruptions) that could lead to sharp market reactions. While it would be best to avoid reacting prematurely to the volatile market changes that are likely this week, we will be following everything closely and instead be patient in waiting for the possible opportunities after things settle down.
PRIOR REPORT: On October 11, 2016 in our report titled “Market Forecast 2016 and 2017” we forecasted increased volatility in the markets due to several factors. One of which was the uncertainty regarding the election. Since that time the markets have retreated and reversed the prior trend to the update as seen in the graphs below. As a refresher please review the commentary below which will include two updated charts.
VOLATILITY: Volatility, as measured by the VIX, is a statistical measure of the dispersion of returns for the S&P 500 index. This index is the standardized barometer for volatility used by most institutional and private investors worldwide.
The VIX has had a weighted average over the past several years between 12-15. This means that there is a 67% chance the S&P 500 will fluctuate in a range between 12-15% over the next year, either upward and/or downwards. We are expecting that this range over the next 2-5 years will increase by at least 50% thereby increasing the weighted average of the VIX to 18-22. This is a most significant change representing an increasing importance on individual stock selection, risk mitigation and the increased potential for overall systemic failures. We do not believe passive investing, or buy and hold, will prove beneficial either financially or psychologically over the next 2-5 years or the foreseeable future. Volatility among all asset classes will rise, creating opportunities in the active equity management, commodity and futures management and hedge fund landscape.
EQUITIES: As mentioned in the discussion regarding volatility above, equities globally could be in for a roller coaster ride. One thing for certain, passive investing in equities will not be rewarded anywhere near the value of a seasoned active money manager or advisor. Buy and hold strategies may get tossed out the window in favor of periodic, if not frequent, rotations of industry groups and individual stocks held within as the stock market’s gyrations occur with more frequency and greater amplitudes.
SUMMARY: We will watch the election and the market reaction and will report our opinion and strategy in the next update.