With the U.S. market seeing a slight upward spike in volatility due to Hurricane Harvey, North Korean nukes and federal policy struggles, money managers still see a long period of relatively low volatility on Wall Street.
Some say that means taking on more risk, and that getting out of bonds and into stocks is a good idea.
Certainly, the most recent data shows things looking up economically, and that’s not just in the U.S., but across the globe.
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The International Monetary Fund recently projected that global economic output would grow 3.5 percent this year and 3.6 percent in 2018, following 3.2 percent growth in 2016. Additionally, after years of broadly accommodative monetary policy, the economies of all 45 countries tracked by the OECD are on course to grow in 2017, including 33 whose expansion is accelerating, Glenmede says in a new research note.
Yet current market conditions reflect increasing investor nervousness, says Richard Turnill, BlackRock’s global chief investment strategist.
“The CBOE Volatility Index (VIX), a measure of S&P 500 Index volatility, has posted daily moves of 30 percent on two of the past 10 days,” Turnill says.
Investors are also looking toward a confluence of events over the next few weeks that could raise volatility, Turnill adds.
“First, a fractious U.S. Congress needs to agree on a budget for the fiscal year 2018 by the end of September and raise the so-called debt ceiling that limits government borrowing,” he says. “Second, the Federal Reserve is about to embark on an unprecedented winding down of its crisis-era balance sheet. This coincides with a European Central Bank readying to scale back its asset purchases. Third is a potential flare-up of U.S.-North Korea tensions.”
These worries come at a time when sustained market volatility is low across the board — both in markets and the economy, Turnill says.
“For example, the five-year rolling realized volatility on the U.S. Consumer Price Index dropped to a record low in July,” he says. “Our bottom line is this: We view any near-term uptick in volatility as short-lived and a potential buying opportunity, unless political events materially dent business and consumer confidence.”
Turnill adds, “Today’s backdrop of sustained economic expansion favors risk-taking, we believe. We prefer equities to fixed income in this environment.”
Not all money managers believe that taking on more investment risk is a good idea.
“In general, this strategy suits better for day traders,” says Paul Koger, founder of Foxy Trades in New York City. “But for regular investors, this may have serious consequences.”
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Koger says it’s “OK” to take on more risk, if you’re certain that volatility will remain in the same range. “But if it spikes unexpectedly, that may rock the boat a bit too hard,” he says.
Others say that a better path is relying on simple fundamentals, no matter what volatility is doing — within reason.
“My advice is to limit your risk by buying great companies at a good price,” says Daniel Wachtel, global director at Harbour Capital Partners in New York City. “Patience is the key to being smart with your money and not using emotions.”
There’s nothing good about taking on more risk if it means buying a great company at a high price when investors are so close to a market top. “When the markets reverse into a bear market, you may never see that high price again since you panicked and sold the stock,” Wachtel adds. “Ask the guys who bought any stock during the height and crash of the dot-com bubble.”
Overall, Wachtel doesn’t think it’s prudent to tell clients to take on more risk when the ocean is calm. When autumn arrives and “everyone is back working on their portfolios,” the stock market may get volatile, he says.
There seems to be some consensus that day-to-day market fluctuations are the playground of traders, not serious investors with long-term time horizons.
“For more aggressive traders or clients in or near retirement, low volatility tends to make us all complacent and overconfident,” say Jeremy Torgerson, chief investment officer at nVest Advisors. “The absolute wrong time to get greedy and pour money into a market is after a long bullish market with low volatility. That is almost certainly buying near the top of a market cycle, as I believe we are right now.”
Torgerson says that “no one knows” when the stock market will correct, but everyone knows it eventually will.
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“Being lulled to sleep by boring days on CNBC isn’t the best way to actively manage money,” he says. “My advice is to stick with your investing goals, which have nothing to do with today’s volatility and everything to do with what you want your money to do for your family and your future.”
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