Assessing Volatility Factors
We believe markets will be volatile on a permanent basis. Sad but true. The factors impacting volatility will vary over time but at present we have identified four factors that we carefully monitor to give us indications of economic conditions and market sentiment.
Four critical factors are as follows:
- Vaccine development: When a vaccine is finally developed and distributed, this will be a great relief to consumers and businesses. There's a reason why markets tend to spike on positive vaccine news; investors are looking for signs the pandemic crisis will begin to fade as a vaccine is distributed.
- Virus prevalence: As the United States continues to grapple with the current COVID-19 outbreak, sentiment and conditions are impacted greatly by the path of virus infection. The news as of late has not been positive with over 60,000 new cases in the United States alone on a one-day basis*. Until virus infection levels moderate, or the curve truly begins to flatten, this will continue to be a major volatility trigger.
- Economic Recovery/Slow Down: There is no doubt that the pandemic has significantly impacted economic conditions. Now the next phase begins: How well will the economy recover from a horrible 2020 virus outbreak? Economic news will give clues as to the overall trajectory of economic recovery post pandemic. Remember, the markets tend to look 9 to 12 months ahead which is why the markets have rallied in the last three months.
- Jobless claims: The US economy is a consumption economy. When consumers and businesses begin to emerge from shelter in place orders, this will begin to positively impact unemployment rates. An unemployment rate in the single digits would be considered a major victory. Markets will be watching carefully to see if employment levels begin to return to normal.
A graphic illustration of these four factors is listed below. You will note that we have assigned percentages associated with each factor. At present, we believe this is the weight that should be assigned to each of these factors as we assess overall volatility. This weighting assessment is adjusted on an ongoing basis as we examine volatility risk triggers.
One important item to keep in mind is election volatility. This year's election cycle is bound to be without precedent and will likely lead to swings in markets and increased levels of volatility based on projected election outcomes. You can expect political news to impact markets. We are assessing the probabilities of different legislative and administration outcomes and our analysis will help guide our investment strategy in the fall of 2020.
We think the most obvious statement is that markets will continue to be volatile. You can count on this and I expect you to see significant swings and increased panic/euphoria. In an environment riddled with uncertainty, we believe positioning portfolios in assets that have strong cash flow, sector tailwinds, prudent corporate strategies, and dividend streams makes sense. We will continue to adjust as conditions dictate.