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Making Sense of Relentless Volatility

CAMS Weekly View from the Corner – Week ending 11/30/2018

December 3, 2018

Since the beginning of October the stock market has experienced a tremendous amount of volatility.  The initial breakout in volatility and breakdown in stocks came from a quick increase in market based interest rates – most notably the Ten Year Treasury bond.

This increase in interest rates came on the heels of on-going strong economic growth into the early fall season.  With the type of economic strength being displayed the concern became that interest rates across the board would escalate quickly and would ultimately hurt future economic growth.

As quick as the above scenario began to be a primary market concern there became (seemingly) a collective concern that perhaps an economic slowdown had already began.  The bell ringer for this concern was yet another stream of Housing oriented reports that offered the headwind said market was displaying through the spring and summer seasons was not a fluke but perhaps a trend.

Housing is an important contributor to the overall economy and with this the amazingly quick shift occurred from the economy was too strong to suddenly viewed as weakening too quickly.  Throw in some election uncertainty and downstream question marks about future economic policies coupled with overall Trade tensions and volatility has become the daily norm.

The above is all true and offers valid concerns from overall market participants.

In order to make sense of all of this we simply have to go back to the basic realization that our current stock market is historically highly valued.

Highly valued markets do not offer guaranteed downside price action.  They do guarantee tremendous downside price action though if the economic backdrop dissipates into an economic recession.

It is here where the above volatility does make sense in light of the absolute need for economic growth to continue in order to support this historically highly valued stock market.  Even a hint of a potential economic slowdown brings with it market jitters.


Click For Larger View:   https://fred.stlouisfed.org/graph/?g=mh1q

The above chart depicts the percentage growth of Real Personal Consumption Expenditures compared to a year ago.   The “Real” part means this measure subtracts out inflation to better gauge the level of true consumption demand rather than having the resulting figure inflated because prices are higher compared to the year ago period.

In the past couple of years this important measure has remained in the range of 2-3% growth with it currently registering the upper level of that range.  In light of its strength this will be a positive contributor to the 4th Quarter GDP result.

It is imperative this measure continues to stay in the current range or gets better lest we see real consumption begin to downtrend.  If this were to happen it would present additional big picture concerns for market participants and with this could easily lead to an actual stock market downtrend.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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