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The Volatility Recipe

CAMS Weekly View from the Corner – Week ending 3/3/2018

March 5, 2018

“The economy is solid + profits are growing + stock valuations are high + inflation is chirping + interest rates are rising = expect volatility.” Weekly View 2/5/18:  Strong Economic News Brings Market Turbulence?

Strewn throughout recent Weekly Views we have offered an economic and general market backdrop that leads to a logical follow-on of increased and on-going volatility in markets generally.  Increased volatility can be unnerving to investors especially in light of their recent historical experiences with markets’ calm and consistent upward ascent.

Our header quote is an excerpt from a recent View that succinctly lays out the general landscape.

Our internal economic and market analysis consistently walks us to a now well recognized trail-head of what we have come to call “the volatility recipe”.  This has become so consistent that at times we have had yet another head slapping “V8 moment” whereby, yet again, we realize we are talking about the volatility recipe without realizing it.

In light of the various aspects of this volatility recipe collective market participants are processing a lot of data that many times offers simultaneous concerns and celebrations which results in yet another day of volatility throughout markets.

The ingredients of said recipe bring endless scenarios and market interactions on any given day.

One general scenario can be the release of a strong economic number bringing with it enthusiasm from investors.  Simultaneously this can bring caution of said strength leading to concerns of increased inflation and through this increasing fear of higher interest rates to combat said inflation concerns.

At the same time enthusiasm with the economic strength coincides realizing an economic backdrop continues to exist whereby companies can grow their sales and profits going forward.  This reduces concerns of the historically highly valued stock market in light of an expected environment whereby increasing profits can support the expensive market.   (Profits are the lifeblood of company stock prices.)

This leads to a recirculation back to caution in that said inflation/rising interest rate concerns will bring with it a slowing economy and hence challenges for companies going forward to grow their earnings at levels needed to support highly valued stock market levels.

Welcome to the current environment of market analytics and to our way of observing, an obvious and aforementioned volatility recipe.

All of this invites volatility as an end result while participants process the landscape and make position moves with buying into or selling out of markets.

At the end of it all we absolutely need consistent on-going economic growth to support this highly valued market lest we experience a significant drawdown.  Absent growth, volatility will surely turn into a clear downtrend – hence our vigilance on the economic backdrop at this stage.

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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