When it comes to stock market volatility, risk seems to start very slowly and then happen all at once. I’m sure you’ve heard friends talk about their investment accounts “taking the stairs up and the elevator down.” The decline we saw in the S&P 500 index* from October 1 – December 24, 2018 was fast and furious. The market was able to wipe out almost two years-worth of gains when it fell approximately 20% from peak to trough in just over nine weeks. If you’ve been investing over the past 20 years, you’ve been able to see two of the largest declines in stock market history. This leaves investors questioning, “when will the next big crash come?”
I encourage investors, at this point in time, to take a very long-term approach to our current investment and economic set-up. I believe there is a good chance that the almost unethically pro-business policies coming out of the Trump Administration will create a 1990s type of economic environment. Most investors are looking for what is going to cause the next big crash, and I would contend that while everyone is looking for the negative outcome, almost no one is looking for an economic melt-up.
Although we are very positive about the economy and the set-up we have, we are still watching three indicators of volatility. First, with the economy heating up, the typical response from the Federal Reserve would be to start normalizing interest rates. Increasing the Federal Reserve rate allows for the powers that be to try to manipulate inflation and unemployment rates. A quick increase in interest rates could be very disruptive to the overall equity markets. In fact, I would attribute much of the losses incurred last October to telegraphing by the Fed of a quicker-than-usual interest rate-increasing environment.
Second, trade negotiation with China is the equivalent of two heavyweight boxers duking it out in a nine-round battle. Both President Trump and President Xi have much at stake, mainly their “huuuuuuuuge” egos. As tensions flare and retaliatory tariffs are implemented, we could see volatility happen quickly and lead to market declines. We don’t expect a lot of headway to be made in the near-term and could easily see these negotiations last until the elections. China’s president gets the advantage of playing a much longer game than President Trump. In just 20 short months, President Xi may be dealing with a completely different administration.
The last event we’re watching is “Brexit” – the attempt by Great Britain to leave the eurozone. The eurozone was formed to create some type of European utopia in which one currency and open borders would create an easier and healthier economic state. The essential problem with this is that all of Europe is now able to borrow money based on Germany’s and Great Britain’s credit ratings. From what I can see, Germany is calling the majority of the shots in the eurozone, and it is only by bending knee to the German Chancellor that you’re able to take advantage of eurozone membership. The only problem is the British are a proud people – they didn’t give up their currency like the majority of eurozone members – they have a strong army and economy, and they still have borders, kind of … because they’re on an island.
Quickly-rising interest rates, botched trade negotiations with China and Brexit could, altogether or individually, stoke investors’ fears and cause very hectic short-term volatility. We encourage investors to be patient and wait for these volatile times to look at putting money to work on the pullbacks. If our thoughts are correct and a continued rapid increase in economic activity sets in, all of this volatility will end up looking like tiny squiggles on a very long-term chart of prosperity for investors who can keep their emotions at bay and stick to the long-term process.
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OLV Investment Group is independent of Sigma Financial Corporation and SPC. *It is not possible to invest directly into an index. Past performance is no guarantee of future investment performance. This article is for informational purposes only and should not be construed as investment advice.