Viewpoints
Pump Up the Vol

Pump Up the Vol

Last week’s sharp increase in “vol” (or volatility, for the casual observer) of U.S. equities was a subtle reminder that financial markets cannot go up in perpetuity.

Recently, I was accused that my blogs have a somewhat “bearish undertone.” Whereas a defensive argument could be crafted, it is more important to report on facts and discontinue most of the economic illusion populated by mainstream media. Last week’s sharp increase in “vol” (or volatility, for the casual observer) of U.S. equities was a subtle reminder that financial markets cannot go up in perpetuity. From a global perspective, the reminder was delivered sooner; aside from most U.S. equities, numerous asset classes experienced significant downturns and corrections in the weeks before last - we were warned. There are now risks to monitor and opportunities to be claimed.

What gets lost in the media’s translation is that our policymakers are worried as well. A distant headline over the long weekend postulated that the U.K and U.S., in a joint effort, will conduct “war games” to test the stability of their respective banking systems. Policymakers from both countries will “test” their responses, in case a U.S. bank with British operations should fail and vice versa. The IMF, in October’s Global Financial Stability Report (a worthwhile read), echoes the need to “game the system,” as global growth continues to rely heavily on accommodative policies that promote excessive economic risk-taking and financial (in)stability overall. 

With the IMF assessment in mind, our fears of (much) higher interest rates may turn out to be an old wives’ tale. Sharp increases in the price of economic financing to governments, businesses, and the consumer would be significantly counterproductive. To this point, we have experienced the slowest recovery on record: global economic performance across the board is at best mediocre, and, consequently, central banks and policymakers will have no choice but to further promote accommodative measures.

What remains is “American Exceptionalism.” On a relative basis, the U.S. economy is much better positioned compared to other developed and developing nations. Nevertheless, and basis for caution, it may be too early for America to become the “engine” to the rest of the world. Given current status, global policymakers are racing for the same outcome, a concept historically known as “beggar thy neighbor.” Low rates and weak currencies are the “oil” for economic aspirations and competitiveness, but, in a global context, cannot be achieved for all parties involved, thus creating a breeding ground for international disagreement and political conflict. 

There is a silver lining. Recent volatility and economic slowdown have really shaken the commodity sector, especially in agricultural and energy-related goods (oil at 2010 low). Those developments will be highly beneficial to corporations and the consumer. U.S. domestic demand has been strengthening, and solid employment gains seem to have become the norm. Further, according to the IMF’s revisions to its global growth outlook, a significant risk is centered on developments in Europe, which is not exactly a new a story.  Economic soft-patches, especially in the U.S., may just be a function of secular stagnation, rather than a reverse in trend. 

As we recently discussed in “A Contract With Myself,” it is as critical as ever to ground financial decisions in a sound planning-based approach. Increasing volatility is not only a numeric outcome, but more so a psychological one. In the absence of clearly stated financial goals and objectives, clients have the tendency to “bail” on previously embraced investments, often the result of a recency bias (wanting to buy what has performed well). With volatility on the rise, advisors and their clients should prepare a “shopping list” to take advantage of falling prices and increasingly more attractive valuations, as a buying opportunity for long-term thematic investments.

 

 

Matthias Paul Kuhlmey is a Partner and Head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions. For the rest of his blog posts, visit here. You can also follow him on Twitter @MoneyClipBlog.

TAGS: Investment
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