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Volatility, Confusion and Portfolios

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Volatility, Confusion and Portfolios

As with most other areas of life, the financial world can become confusing, a reality demonstrated by a cartoon making the rounds in the financial sector.

The picture shows a newscaster and the caption says: “On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down.” The caption goes on to say, “The realization that lower rates might stimulate the sluggish economy pushed the markets up before it ultimately went down …”.

While this is a cartoon, it has the ring of truth, given the current complexity of stock market gyrations.

Developments of last week including the brutal sell-off were even more confusing although they made one thing abundantly clear (again). Market volatility is the new normal and can be expected to continue for some time. The sell-off took the Dow Jones Industrial Average down by just over 800 points, reportedly the fourth largest drop in its history.

The DJIA, generally called ‘the Dow’ is an index of 30 large blue-chip corporations. Its importance lies in several factors including its representation of major sectors such as finance (Goldman Sachs), consumer staples (Coca Cola) technology (Apple), pharmaceuticals (Pfizer)and others.

As is often the case, last week’s plunge resulted from the convergence of several factors: overheated worries about the trade dispute between the United States and China, recessionary fears, the global slowdown and gyrations in the bond market. Adding to the market angst, the plunge was followed by whistleblower Harry Markopolos’ damning report on General Electric including an interview in which he termed the formerly venerable company ‘a bankruptcy waiting to happen’.

Meanwhile the continuing unrest in Hong Kong added to the uncertainty surrounding companies which derive a major part of their revenues from the region such as Las Vegas Sands which is heavily dependent on tourism in the region and Cathay Pacific Airlines where Chief Executive Officer Rupert Hogg resigned as the airline’s revenues continued dropping with flight cancellations due to protests.

Late in the week, equity markets got a partial recovery.

And as if all of that wouldn’t leave our news anchor and his listeners sufficiently confused, Jyske Bank in Denmark introduced a negative interest rate mortgage, apparently the first of its kind. And in Switzerland, UBS told its clients that it would introduce a charge of 0.6% a year if they deposited more than €500,000.

These are not typos.

Shares in European banks in Germany, Spain and Italy continued at or near all-time lows. (More about these events in a future column.) As the smoke continues clearing, it might help to consider some or all of the following:

–   Volatility by its very nature is frightening

–   This sequence of events — or something like it — will happen again: the trade dispute shows no sign of any imminent settlement and these tensions will continue to overhang the market until a settlement is reached;

–   The global slowdown is unlikely to reverse in the short term and recessionary fears remain a concern

–   Current U.S. economic data do not suggest a recession at this time;

–   While a recession will come at some point it appears unlikely during the remainder of this year; acknowledged experts such as Mohamed El-Erian, Chief Economist at Allianz has suggested that current economic data do not point to a recession and former Federal Reserve Chair Janet Yellen stated that the U. S. is ‘most likely’ not entering a recession during an interview with the Fox Business Network. During the same interview on Fox, Yellen suggested that he U.S. economy had enough strength to avoid a recession although she did concede that the odds of one have risen higher than she is comfortable with

–     Keep your cash holdings large enough that you will not be forced to sell an investment at the wrong time

–     Keep your exposure to European and Asian stocks to within comfortable limits

–     Check whether your asset allocation plan needs adjusting for the continuing volatility

–     Take some profit and re-invest it or use it to build up cash reserves so that the next plunge becomes less traumatic

–     Consider whether a beaten-up stock is a genuine buying opportunity or simply a beaten-up stock

–     Revisit your risk tolerance

–     Resist the temptation to sell in the heat of the moment

–     Markopolos’ report, while damning is the most recent chapter in the GE saga

–     Hold off on any shotgun decisions until you speak to your advisor

–     Question whether you still have the same faith in your investments as you had when you made the original decision

–     As the U.S. Federal election gets closer, the political hyperbole will increase.

Related: The Newscasts, the Headache & Your Investments

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