The stock market has had an increase in the level of volatility over the past several months.  Generally, more volatile markets can have a negative impact on the psyche of investors because of the perceived possibility of greater loss. The reality is there are always fluctuations in the stock market and bursts of volatility are quite common.  Our stance is that, while volatility and uncertainty can create higher concern in the short term, investment opportunities are created by volatility that can pay off handsomely in the future.

A common measurement of stock market volatility is the CBOE Volatility index (VIX). The VIX is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. It provides a measure of market risk and investors sentiment; some refer to it as a fear index.  As seen in the chart below, the VIX has had several spikes in volatility over the last few years.

Even though the stock market has had periodic bouts of volatility over the last three years, the S&P 500 was still up over 44% during this period¹, despite the volatility.                                                                                                                              

Another measure of volatility is the number of days of a plus/minus 1% change in the S&P 500.   In 2019, there have been 32 days of plus or minus 1% moves, with 13 coming in the last month alone. Putting that in perspective, the average move of more than 1% has been 66 days per year for the last 19 years (see the chart below).

Further, the chart reflects only one year in the last seven that has been above the 19-year average. This shows that while volatility has picked up recently, this isn’t out of the historical norm and, in fact, has been less volatile compared to other periods. 

There are several reasons why market volatility has picked up in the recent months, including

• Global economic data been slowing
• Global interest rates have been compressing
• Increased trade tension between the US and China

The reasons for volatility are real, but the one constant of the market is there are always issues to worry about whether it is the economy, Federal Reserve policies, elections, oil prices or the health of the consumer.

While volatility certainly brings anxiety, it is not necessarily always a negative occurrence. Volatility can be positive and refer to times when stocks are moving up quickly. Most investors are more concerned with downside volatility but even that can create long term opportunity for investors who are prepared to take advantage of these situations through dollar cost averaging.

 As we stated prior, volatility is common in the markets, and timing these instances is extremely difficult.  For investors interested in reducing overall volatility for their investments, we have recently launched the “Gradient Buffered Index Portfolio”.  This portfolio offers a pre-determined level of downside protection, allows investors to participate in market upside (to a cap level) and has a short-term maturity. If you have interest in this type of strategy, please feel free to reach out to Gradient Investments for more information. 

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Over the trailing twelve months the U.S. stock markets experienced three distinct corrections.  Each of these corrections were preceded by the major U.S. stock indices reaching new all-time highs. 

In the fourth quarter of 2018, a combination of higher short-term interest rates, hawkish comments from the Federal Reserve, a looming inverted yield curve, trade tensions between the U.S. and China, a government shutdown, slower global economic growth, falling oil prices and investor fear brought the S&P 500 down 13.5% for the quarter.  After a great start to the New Year, enter the May stock market correction.  This one month sell-off was somewhat self-induced as the U.S. turned up the heat on China with the threat of a new round of tariffs.  The threat became reality as the administration raised tariffs from 10% to 25% on $200 billion of China imports. The S&P 500 reacted with a 6.8% correction.  Corporate earnings and belief of multiple rate cuts became June and July’s rally cry.  August quickly became the third round in this mini correction cycle as the S&P 500 retreated 6.0% during the height of this month’s sell off.

The August setback actually began in the afternoon on the last trading day in July when the Fed cut the fed funds rate by 0.25% noting “global developments” and “muted inflation” as their rational.  In the post decision press conference, Fed Chairman Powell framed the cut as a “mid-cycle adjustment”.  Investors immediately interpreted this to be a one and done rate cut; they were expecting more.  If this wasn’t enough, the next morning the markets were greeted with a presidential tweet announcing a new round of 10% tariffs on the remaining $300 billion of Chinese imports effective on September 1^st.  This one-two punch sent the market into a violent tailspin.  The fallout in global stock prices sent gold prices higher in a typical flight to safety trade, and global interest rates went into a freefall causing bond prices to rise.   

On the economic front, the news was not so dire.  The July employment numbers released by the U.S. Department of Labor showed 164,000 jobs created.  The headline jobless rate held steady at 3.7%.  Monthly job growth has averaged 140,000 over the past three months, 47,000 lower than the 2018 average.  Retail sales surged in July as did durable goods orders.  Lower mortgage rates are beginning to revive the weakening housing market.  On the flip side, we saw a slump in industrial production, a rise in import prices and some softening in very strong consumer confidence numbers. 

Stocks around the globe gave way to multiple pressure points.  The combination of falling interest rates, negative interest rates, inverted yield curves, trade wars, tariffs, Hong Kong protests, central banks, Brexit, geopolitical risk and fears of recession collectively brought global stock markets down.  When the dust settled at month end, the Dow Jones Industrial Average, NASDAQ Composite, and the S&P 500 lost 1.32%, 2.46%, and 1.58%, respectively, in August.  International stocks continued to reflect economic uncertainty as the MSCI EFAE and emerging markets indices declined 2.59% and 4.88%, respectively. 

Interest rates and the shape of the yield curve made front page headlines in August.  An inverted yield curve has become the poster child for signaling the next recession.  In August, we had the first inversion between the 2-year Treasury and the 10-year Treasury note.  Recession fears and a flight to quality trade sent global interest rates to zero and in some countries well into negative territory.  In the U.S., the 2-year Treasury note yield fell 39 basis points to end August yielding 1.50%.  With the fed funds rate now pegged at 2.00%, it’s obvious the market is still calling for multiple future Fed rate cuts yet this year.  The bottom fell out on longer term yields as the 10-year and 30-year Treasury securities declined a mind boggling 52 and 57 basis points respectively bringing their yields to 1.50% and 1.96%.      

The August downturn and spike in market volatility can be emotionally unsettling for most investors.  This is an appropriate time to rise above the current headlines and assess your financial plan in the context of your long-term financial goals.  Today the market is worried about a slowing economy, an inverted yield curve, recession and a 10-year bull market in stocks coming to an end.  The focus of your concerns should not be directed at the market, but rather on your own financial plan.  The key questions to ask yourself are:

• Am I invested at an appropriate level of risk?
• Is my asset allocation in sync with my long-term financial goals?
• Does my portfolio have proper diversification?
• Will the plan meet my income needs over time?
• Does my plan keep me ahead of inflation?

The market is not under your control.  Your financial plan is under your control.  Don’t let the market take control of your financial plan.  When the going gets tough, like it did during the last three corrections, stay true to your plan.  Stay invested at a risk tolerance designed for your situation and avoid the common pitfalls.  Do not allow the market to take control of your financial plan.  

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

As we progress through 2019, one of the predominant themes has been the dramatic reduction in interest rates across the globe.  While interest rate cuts are meant as an elixir to struggling economies, it also has the effect of lowering rates of return for bonds and other safe assets.  As a result, many investors are left with questions on how to generate income in their portfolios while staying within their personal risk profile. 

In the US, interest rates have been declining precipitously.  Per the chart below, US 10-year treasury rates have decreased from a recent high of 3.22% on November 2, 2018 to 1.55% on August 16, 2019. 

Further, August 14, 2019 saw the 30-year US treasury hit an all-time low yield of 2.06%, per Marketwatch.com.

When US rates are declining aggressively, it makes existing bonds more valuable (as they are paying higher than current market rates) but creates lower return for new bond investors (or those that are reinvesting proceeds from matured bonds).  A perfectly suitable alternative, historically, was to look to international bond markets for potentially greater yield.  At this time, however, many international markets are paying NEGATIVE YIELDS, which means that you will receive less money at maturity than you are investing today.  The chart below, from JP Morgan, shows the current yields for government bonds for several different countries. The bonds highlighted in red currently have negative yields:  

A logical question is why anyone would invest in a negative yielding bond.  The answer is that speculators buy these bonds as they expect rates to go lower, thus making their negative yielding bond more valuable in the short term.  In our opinion, this is a dangerous game that does not seem sustainable over the long term.  So, for investors looking for additional income in a low/negative yield world, here are some of our suggestions for alternatives:

• Dividend paying stocks: Our G50 and G40i portfolios are currently generating above 3% per year in dividend income.  Further, the companies we invest in are healthy companies with long term track records of paying, and increasing, their dividends.  This dividend increase is a powerful force to offset the effects of inflation and provide a greater amount of income over time.
• Alternative income assets: Alternative assets that lie outside traditional stocks and bonds are investments such as REITs, preferred stocks, and senior bank loans.  These assets are generally higher risk than traditional bonds but offer a higher recurring income source.  Our Absolute Yield portfolio is a terrific example of a diversified asset allocation strategy that invests in high income assets and is currently yielding over 5%.

Overall, if investors want additional income in the current market, they will have to accept higher risks.  We would not expect a lot of return from traditional bonds at current levels, but they still have a place in client portfolios as a means of risk reduction.  US treasury and US corporate bonds, despite the recent collapse in interest rates, still provide positive relative income and can offset volatility from riskier investments. 

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.