Saturday, January 31, 2015

Volatility in the equity market, yes, but is it something else?

Most of the market talk in January was about the increased volatility of stock prices.  That is a fact. Volatility has markedly increased following the mostly placid melt by the market in 2014.  Now it looks less like increased volatility and more like a market correction that is underway.  Exceptional results by some companies are being recognized by the market, but anything less than that is met by languishing demand and liquidity building.

There are a competing series of events.  Current U.S. consumer confidence measures are strong, economic growth slowed in the fourth quarter, consumer spending picked up, while aggregate wage growth is not keeping up with inflation.  Bond prices, as they rise and rates fall, are surely telling investors something but it is difficult for the stock market to decipher as it develops.  Are they saying that the economy and the market outlook is much weaker than stock market analysis suggests?  One could think so, and conclude that the stock and bond markets are at odds, and the first to give in will be the one that is displaying less caution, that could be stocks.

That dichotomy may be due partly to the looming challenges of global politics.  The Ukraine situation is getting worse, not better as had been assumed a few months ago, and the resilience of Islamic State, or ISIS or ISIL, is becoming newly alarming.  Groups claiming to have ties to the group have recently surfaced in Afghanistan, the Sinai of Egypt, Tunisia, Libya, and even East Asia, and Al Qaeda links are claimed in Nigeria and Mali.  The ISIS unexpected disruptive and deadly strike yesterday in oil rich Kirkuk, in Kurdish, Iraq, is alarming.  Stopping most civilian traffic at Baghdad's international airport on Thursday was not reassuring.  All of this, and much more in the international scene, cannot go unnoticed by the financial markets.  It will manifest itself in caution and not in any specific market research.

The currency wars that are beginning is not helping the outlook, and Putin's decision to lower Russian interest rates Friday to further weaken the ruble's value was a sign that his priority is in fighting the West in any way possible, be damned the Russian people and their flexibility in purchasing power. The dramatic, truly dramatic, collapse in the price of oil over the last six months has investors struggling to find a way to value the phenomenon.  When there is uncertainty, investors always back off.

Some investors are backing away from the equity market now.  This may be a short term correction, and it may be both necessary and ultimately constructive, but corrections are never reassuring until they are over.  What has been underway in January does not seem to be over.  The improving attributes of the U.S. economy will eventually overcome this slide, but it will take patience to see this through. Unfortunately that word has been used too much in recent comments here.  It still works, assuming no seismic events are on the horizon.

Staying the course here, while not being naive about maintaining adequate liquidity, I hope!


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