Where's the Boogeyman? Rising Volatility?
With the markets on a roll and volatility still at record lows, my prose may at times appear overly cautious as I assess the markets, but remember that’s my job. Portfolio managers are essentially professional worriers, looking around every corner and under every data point for the hint that a major shift is on its way as our primary job is to protect. These days many of us feel like we are in a CNBC version of a thriller, with the ominous music getting louder and louder as our handsome hero approaches the dimly lit house. When is the boogeyman going to jump out!?
“For as long as I can remember, veteran businessmen and investors – I among them – have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips… The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. The seeds of any bust are inherent in any boom that outstrips the pace of whatever solid factors gave it its impetus in the first place. There are no safeguards that can protect the emotional investor from himself.” J Paul Getty (Hat tip to John Hussman for helping us recall this sage sentiment.)
Looking at today’s markets, “Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk.” Bill Gross of PIMCO on May 14th, 2013. Ouch!
On May 22nd the markets became exceptionally jittery, the boogeyman soundtrack getting a tad louder. Concerns over a withdrawal or reduction of the Fed’s bond buying program from Ben Bernanke’s comments before Congress coupled with the minutes of the FOMC added to increasing nerves over the level of data fakery coming out of China, which has turned up the volatility volume considerably. Keep in mind that if the stock market were to be reflective of the fundamentals and not experiencing a Fed induced bubble, why the tizzy fit at the slightest whisper that the Fed could reduce its bond buying program, a program which has seen the Fed’s balance sheet increase a mind-blowing 40% year-to-date? Whether this is the beginning of a correction or a temporary blip remains to be seen, but the dramatic swings during the day warrant caution. Is that the theme from Halloween I hear in the distance?
May 22nd the Japanese Nikkei fell 7.3%, its biggest drop since the tsunami/nuclear disaster in March 2011. Before Thursday, the Nikkei has risen 50% this year and 10% in less than two weeks. Kudos to ZeroHedge for the chart at right which points out how similar the recent run up has been to the boom and following bust in 1987.
After the tumult in Japan, investors quickly jumped out of riskier assets. Spanish and Italian government bonds weakened, as did more-speculative currencies like the South African rand. Havens such as German government bonds and the Swiss franc gained. Gold rose.
Hong Kong’s Hang Seng dipped by 2.5%. Shanghai maintained a moderate fall at just 1.2%. The following day all the major European markets dropped by over 2%.
Bottom Line: I doubt the past few rocky few days are the start of the correction we’ve been expecting as the primary drivers of the market run, namely Central Bankers, are still putting pedal to the metal, despite the nerves over yesterday’s FOMC meeting notes, (see charts at right). I do think that it is likely we will continue to see volatility increase in the coming months before we see any potential significant correction.
