What’s To Blame For All This Summer Volatility?

By Christopher R. English, President of Lumen Capital Management, LLC

It would be an understatement to say there’s been a lot of price volatility in stock prices recently. Almost daily, we see stocks moving in 1-2% ranges. One day we’ll be up quite a bit, then the next day we give it all back and more. What’s going on? We’ve gotten used to volatility lately, but why this sudden increase? Here are some brief thoughts as to why our markets are going haywire.

Remind Me Why This Is Happening...

Abrupt up or down moves in markets occur when investors are caught on the wrong side of an event and have to adjust their portfolios or investment analysis to what has just occurred. There have been several recent negative and unexpected pieces of news that have caught investors by surprise.

The Fed

First, markets started declining at the beginning of the month when the Federal Reserve lowered interest rates but indicated they were not necessarily inclined to keep on that same course. Investors had hoped they would indicate this was the beginning of a cycle of lower rates for the economy instead of a one-time event.  

Trade

The markets are also seemingly held hostage to the twin concerns that the economy is weakening as a precursor towards a recession and the never-ending Chinese trade talks. These issues are related, as investors have tied the slowing economic growth with rising trade tensions with the Chinese as well as other countries. Despite the legitimate worries, I still think the risk of a recession next year is low. Recent economic data isn’t signaling that an economic contraction is on the immediate horizon. It’s hard to believe we’re on the cusp of a recession when unemployment is at record lows and shows no signs of changing course. Corporations may already be in a profit recession and growth may slow but a full-scale recession seems like a low probability at the moment.  

However, I have come around to the view that in the current environment a trade deal with the Chinese, or at least a meaningful one, is also an unlikely event. In my opinion, the political class in both China and the U.S. view each other as more of a strategic competitor than a reliable trading partner. As such, we probably won’t see the Chinese being willing to give up enough for the Trump Administration to come away with a comprehensive deal before next year’s elections. That's not to say we won’t see something before we all vote in 2020, such as a deal on agricultural products, but it won't be in China’s strategic best interest to give up on technology transfers or limiting market access to U.S. companies. The world is now going through a period of adjustment to this new trade reality.

The Seasons

You’ve heard me say, over and over, that the seasonal weakness that often starts in late summer and lingers into  autumn is something to take into account. We’re now in the dregs of summer and historically, negative things seem to pervade the markets around this time of the year.  On that front, we can add the situation in Hong Kong, tense relations between India and Pakistan over Kashmir, or a whole list of the usual suspects to remind us that the world is a tense place right now.

Got It. So Will This Continue? 

That's the backdrop to all this volatility. Now, let's look at some numbers and money flow thoughts. As I write this, major indices are down about 5-8% from their most recent highs. Stocks tend to start corrections with violent sell-offs and it's pretty normal to see markets lose 5-10% in a short amount of time when markets change directions. I think there’s a high probability that the volatility we’re seeing will continue this month and perhaps bleed into the September to October period as well. Volatility is likely magnified right now because we’re in the last two weeks of the summer vacation season and market liquidity is not as deep as it might be at other times of the year. Again, volatility is how we speak of the day-to-day movement in stock prices, but for the most part, investors relate to volatility in terms of market declines. As you can imagine, they're not too worried about price movements when stocks go up. 

Stay The Course

I do want to make you aware that there’s an increased chance right now that the short-term trend for stocks will be on the lower end. So far, there’s no evidence that the longer-term bull market is in danger. Unless you're a short-term trader or have experienced a change in your asset allocation strategies, investors should think carefully before making portfolio changes based on a few week's worth of news. I’ve been investing for clients in one form or another for over 30 years. I’ll bet you that a healthy majority of those years have seen a late summer scare or period of weakness. My guess is you could substitute this summer’s concerns of a recession or China tensions for any number of past issues and pretty much see the same script play out over and over. Sure, there were times like 2007 when investor’s concerns morphed into something more substantial, but the majority of those years investors that sold into the fear regretted their decisions.  

For example, in August 2011, the U.S. government lost its vaunted triple-A credit rating.  Concerns had been rampant for a while that this might happen and markets were already down pretty substantially from recent highs when one of the major credit agencies cut their rating on August 5th. Stocks declined between 5-8% the next day and didn’t fully come out of their funk until later in the fall. But the investors who sold based on that scare missed out on a pretty significant rally in the coming months. The S&P 500* is now up over 150% since that time, not including dividends. Nothing is guaranteed and returns like we saw back then may not be in the cards this time around since stocks were cheaper back then than they are today. However, my guess is that when we look back at this summer years from now, we’ll view our anxiety and worry in the same light as we’ve come to view most late summer periods of volatility. To use some Shakespeare, we will look back and see a lot of sound and fury that ultimately comes to signify nothing, or at least nothing substantial. There is a good chance that this is a normal correction made worse by the season and I’ll stick to that view until there’s deterioration in the economy or a change in our indicators. 

As always, we are here for you. Please let me know if there’s a change in your situation and reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com if you want to discuss any concerns that are plaguing you.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

The information contained here is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate disclosure is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clients. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice.

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.