VolatilitySubmitted by Destination Wealth Management on December 13th, 2018
I am asked regularly to comment on why I think markets are volatile. The easy answer is China trade and interest-rate policy. This certainly makes sense but is only half the story. The reality is that volatility is more of a systemic issue than many people believe.
Markets are more volatile simply because the ability to move quickly has increased through the use of program trading and computer analytics design to trade at a moment’s notice based on a given headline. There is no other way to explain a 500 point swing up and down in the market with no apparent news driving the fluctuation.
While those in the media (including myself) do their best to describe rational reasons for market movements, the reality is every headline becomes an exaggerated input that causes computers to burst trade. THAT is why I believe markets move so quickly.
This is not to say one should ignore headlines or economic trends. I strongly believe that there is merit in economic analysis and fundamental proprietary research. There’s a reason why we have a research team at Destination Wealth Management; we believe it adds value and is beneficial to those we serve.
What is important is to recognize that the analysis of headlines provides mere indications of general trends rather than specific confirmation of the direction of the economy, markets or assets. This is why the short-term market game is problematic; market movements are not necessarily rooted in rational reactions. A long-term focus increases your probability of success as it diminishes focus on short-term fluctuations based on exaggerations driven by program trading.
We do not believe, based on the information we have in front of us now, that market movements are suggesting an impending cataclysmic financial collapse. The markets have rallied significantly over the last several years and we’re due for a pause. The markets are down about 10% and that is a normal correction (and something that has occurred several times in the last few years though many seem to forget this).
As you know we’ve been somewhat contrarian in our view on interest rates as well as China trade policy. We believe that interest-rate policy will be more dovish than many expect suggesting that rates will likely not rise as much as people feared. Additionally, we continue to believe that China and the United States will work out a framework for a trade policy that will be acceptable to both countries. A trade resolution should put the focus back on fundamentals
I know it is scary to see market fluctuations. I know one might be tempted to assume, based on violent movements in the market, that something dramatic must be occurring. Despite volatility, there are still some positive conditions in the market and once one looks beyond the short-term noise, it becomes a bit more comforting.
I can assure you that despite my calm words, we are highly anxious and always looking at conditions with a view towards negative outcomes. It is my goal to be rational and thoughtful in these updates. I believe every word that I write. But behind the scenes, we are nervous on your behalf and I can assure you anxiety causes us to work that much harder to navigate these uncertain times.
If you have any questions about this information, please let me know. Happy to answer any thoughts or questions you might have.
I trust you are beginning to enjoy your holiday season. I hope it is blessed and peaceful!