Volatility Has Returned

Volatility has returned this week. The technology sector, which as been the strongest area of the market throughout this uncertain time, is experiencing the most volatility. Corrections are normal. 10% intra-year drops occurs about once a year, as per Capital Group. This year has been no exception. Increased volatility is expected as uncertainties related to the economy and the election remain high. We continue to stress discipline and focus on long-term objectives. Brian Wesbury, Chief Economist at First Trust Advisors, recently stated,

The key lesson in all this should be that it is a fool’s errand to try to time the market. Imagine being told on February 15 that the world was about to be hit by a widespread virus for which there was no known therapy or cure, that governments were going to react by shutting down massive swaths of their economies, and that US real GDP was about to drop at the fastest rate for any quarter since the Great Depression. Then imagine you had to make a choice about how you would allocate your investments through year end. Many investors would have opted to sell their equities and not look back. But, as we now know, the better choice would have been to grit your teeth and stay invested.

Below are the topics for this weekend’s reading.

Save Like A Pessimist, Invest Like An Optimist (Morgan Housel)

Another great article by Morgan Housel. As Morgan describes, 100-year events seem to happen all the time. This should be no surprise. If you add up all the potential 1% chances of bad things happening in any given year (hurricane, flood, fire, pandemic, etc.), it becomes a fairly high probability that at least one of those 100-year events happens each year. From an investment perspective, the article is summed by this simple statement,

All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding.

The 2 Variables That Drive Stock Prices (Ben Carlson)

In the article, Ben Carlson describes a formula developed by the founder of Vanguard, Jack Bogle. Bogle’s formula is simple – a stock price’s returns are driven by two variables (1) fundamentals and (2) emotion. The fundamentals piece – earnings growth + dividend yield – is unemotional and not driven by the daily changes in market performance. The emotional piece – changes in the P/E ratio – is derived based on optimism or pessimism about the future of markets. From an investor’s perspective, using the fundamental component should be the main focus. The emotional component is uncontrollable.

Why Is the Stock Market So Strong When the Economy Is Weak? (Wharton School)

Several clients have asked us the same question, how can the market be at all time highs when the economy has suffered greatly from Covid and the related shutdowns? This article attempts to answer that question. They state the following,

1. The stock market is forward looking;

2. The federal government inject liquidity to bridge the decline and hopefully quick recovery; and,

3. The stock market and the economy are apples and oranges in terms of their fundamental makeups.

We hope everyone has a happy and safe weekend. Please give us a call if you have any questions.

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