Dear Volatility Part 2


We would have never imagined we would be writing a second part to our January 2018 newsletter about volatility this quickly, but after a wild couple of weeks we thought it might be timely to circle back and discuss volatility once again. Our January 2018 newsletter titled, Dear Volatility, discussed the lack of volatility we had been experiencing in the markets that has been in effect for several years. It did not seem to matter what was happening in the world, the markets were shrugging off negative news while they gradually continued to rise. The gentle climb in the markets was attributed to both a synchronized economic growth happening all over the world, and growing corporate earnings. February has brought about a change where we saw a rapid increase in volatility in the markets. With a drop of over 1000 points on two separate days on the DJIA investors very quickly experienced a roller coaster ride of market swings and officially dropped into correction territory (meaning a drop of more than 10% from market top to bottom). Any gains we experienced in the month of January were erased and most portfolios are currently sitting slightly lower than they were at the beginning of the year. Many media outlets are searching for answers as to what may have caused the markets to become so volatile. Some are pointing at raising inflation expectations as the culprit, however in our humble opinion, the markets have corrected because that is what they do. Sometimes there is a healthy readjustment of the pricing of stocks and we do not think there needs to be a big or complex reason behind it. We would also argue that this long steady period of extremely low volatility is actually what is abnormal, and this new comeback of volatility is more normal than you would think. Furthermore, you should be prepared to see more of it in the future and as we mentioned in January, we hope you will embrace it. With that said, markets are on their 5th straight day of gains (Fri Feb 16, 2018), and the volatility has subsided for the moment. Most importantly there are a couple thoughts we want to share with regards to how we feel about volatility. One thought is that all the themes mentioned above about a synchronized economic growth around the world, and growing corporate earnings are still intact. We believe this is still a healthy back drop for continued growth in the stock market. The only change might be having to accept a higher amount of volatility to enjoy this growth. Another thought is that the portfolio managers of your mutual funds were ready for this and are reacting exactly as we would hope for, by investing Billions (yes with a ‘B’) of money that was holding its ground in cash, back into the market in high quality companies at much more attractive entry prices. Much as we recommended in January, we believe that remaining in a well-managed portfolio that is in line with your tolerance for risk is still appropriate for our clients, and while it might be a bit boring… staying the course with no changes is our strong recommendation. If you have any questions about your portfolio or the markets please let us know. Thank you, Andrew & Peter

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