VOLATILITY!

The markets peaked on January 26th and volatility is back with a vengeance and that creates opportunity.

Three of the Dow’s biggest daily point drops in its 122-year history, including its 1,175-point record fall on February 5th, have occurred this year. And it was a wild ride Friday April 6th when it plunged 767 points before ending the day down 572 points.

In our last letter, back in January, we wrote “The ride in 2017 was as smooth as silk. There is an old saying that the longer a trend remains intact the more violent the change will be when it occurs. We have not seen such a consistently low level of stock volatility in decades. 2018 will bring more volatility in asset valuations. That’s a given. Stocks are expensive on a forward earnings basis by any metric. Fourth quarter earnings for SP500 companies should be very favorable, possibly the best in six years. With Dow 26,000 I’d assume much of that has already been discounted.”

We had reduced equity positions in the final quarter of 2017 in anticipation of a change in sentiment.

There have already been 27 trading days in 2018 on which the Standard & Poor’s 500 stock index has closed up or down by more than 1%, compared to just ten days in all of last year, according to S&P Dow Jones Indices. If the current pace of 1% swings persists through year-end, it would put the large-company stock index on track for its most volatile year since the financial crisis. USA Today 4/6/2018

Both the Dow Jones Industrial Average and the S&P 500 have fallen into correction territory in 2018. At its lows, the 30-stock Dow shed more than 12 percent from highs reached in January before paring those losses.

CNN Money Fear and Greed Index showing extreme fear based on volatility 4/09/2018

Record low volatility to record high volatility from August 2017 to April 2018

So, where do we go from here? The positives are numerous. The unemployment rate is at historical lows, the economy is strong, earnings are great and tax revenue to the U.S. Treasury has never been greater.

Then there a few other factors which keep us up at night: Dow Jones 1000-point single day swings, tariffs, inflation rising above 2%, taxes, politics, annual trillion-dollar deficits, national debt, rising interest rates, wars, earnings, oil at a four-year high etc. These are just a few things we sort through on a daily basis which have caused us to be more cautious over the last year or so.

Going forward we shall focus more on ETFs and companies developing technological innovation and disruption that will accelerate the pace of change. These areas include Mobility-as a Service (MaaS), robotics, AI artificial intelligence, genome editing and immunotherapy in the healthcare arena and Frictionless Value Transfers, more commonly referred to as “mobile payments.”

As stated in the first sentence, “volatility creates opportunity.”

J. Brock Hamilton
April 2018