A Return To VolatilitySubmitted by Fulcrum Wealth Advisors on March 5th, 2018
By Jonathan V. Bever
This February we have seen the return of volatility in the stock markets. Believe it or not shorting the VIX or shorting volatility has been a popular trade for a few years. Anyone with long term investment experience knows that sooner or later market fluctuations will begin again; this February it certainly has.
So, why has the volatility returned? In our annual outlook for 2018, we point out that there can be periods of raising interest rates without having a flat yield curve or recession. This is still my belief for the foreseeable future.
The S&P market has a historical P/E ratio of about 16.5. The last few years the market been trading well above its historical average P/E; with low interest rates and robust earnings, this is not unreasonable. Likewise, in periods of high interest rates and lower earnings growth the market trades with a lower than average P/E ratio. The Fed has indicated they will continue to raise rates because the economy is strong; this is good news. However, the consequence is market volatility. The market is simply adjusting to a P/E ratio according to a higher interest rate environment. While the earnings are growing for the stock market it should adjust to the rate hikes. This adjustment process takes time and doesn’t happen all at one time.
In short, risk assets will be more volatile than what we have seen in the past few years. Price discovery is good because it gives the investor a chance to buy on the dip.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing