Volatility
Back in 2015, one of my/our themes for the year was that central banks loathed volatility because it eroded confidence. As we discussed in our High Rock weekly webinar on Tuesday, all the liquidity that has been added to the global financial system over the last 9 years:
Has very gradually reduced the level of volatility in the S&P 500 (gold line = VIX, volatility index) and other global stock markets:
This liquidity is going to start gradually being withdrawn from the system beginning this month as the US Federal Reserve starts to wind down its bloated balance sheet by not re-investing in the maturing bonds that are currently part of it.
In other words, the white line in the chart above will start to fall. What remains to be seen is what this means for volatility (the gold line). We suspect that it will start to push the gold line higher, i.e. greater levels of volatility.
The liquidity generated from 9 years of extraordinary (easy) monetary policy has found its way into global stock markets, artificially pushing prices to levels that are significantly above what the economic fundamentals have been confirming: relatively modest growth in the vicinity of 2% annually (pink line is the 12 month moving average which smooths out the quarter to quarter changes):
Stocks (on a global basis: All Country World Index, ACWI ETF) have returned a little over 5 1/2% since March of 2008 (Compound Annual Growth Rate):
So equity markets have been performing at a rate of more than 2X economic growth annually over the last decade.
Clearly, the fundamentals are lagging the stock market:
And Expected Earnings (12 months forward), relative to stock prices) anticipate some additional 20% improvement (over and above the 10 year average):
So, at some point either the fundamentals will have to catch up to stock prices or stock prices will have to fall to be more in line with the fundamentals.
Hope now resides with the Trump Administration and tax reform and cuts to help drive the fundamentals. You can all make your own decisions on what this might ultimately mean (if it is accomplished or not). We will certainly be monitoring it closely.
With declining financial market liquidity, the stock markets will become more susceptible to economic and / or political shocks. We think that this ultimately defines the current investing market (risk is high) and is limiting investment opportunities at the moment.
And as you all may know, we (at High Rock) are not gamblers, we are managers of risk (first and foremost), so we are prepared to wait for opportunities to evolve (as higher levels of volatility create them) and remain prudently cautious (in the short term). With the knowledge that opportunities will develop (as they always have and always do) to allow us to continue to generate longer-term, strong, risk-adjusted returns:
It is also my duty to tell you that historic returns do not guarantee future returns. However, we, at High Rock, work very hard to get the best risk adjusted returns possible for ourselves and our clients (because we invest in the exact same assets as our clients and back this up with an independent Investment Review Committee quarterly report, which our clients will be receiving shortly with their quarterly summaries).
This liquidity is going to start gradually being withdrawn from the system beginning this month as the US Federal Reserve starts to wind down its bloated balance sheet by not re-investing in the maturing bonds that are currently part of it.
In other words, the white line in the chart above will start to fall. What remains to be seen is what this means for volatility (the gold line). We suspect that it will start to push the gold line higher, i.e. greater levels of volatility.
The liquidity generated from 9 years of extraordinary (easy) monetary policy has found its way into global stock markets, artificially pushing prices to levels that are significantly above what the economic fundamentals have been confirming: relatively modest growth in the vicinity of 2% annually (pink line is the 12 month moving average which smooths out the quarter to quarter changes):
Stocks (on a global basis: All Country World Index, ACWI ETF) have returned a little over 5 1/2% since March of 2008 (Compound Annual Growth Rate):
So equity markets have been performing at a rate of more than 2X economic growth annually over the last decade.
Clearly, the fundamentals are lagging the stock market:
And Expected Earnings (12 months forward), relative to stock prices) anticipate some additional 20% improvement (over and above the 10 year average):
So, at some point either the fundamentals will have to catch up to stock prices or stock prices will have to fall to be more in line with the fundamentals.
Hope now resides with the Trump Administration and tax reform and cuts to help drive the fundamentals. You can all make your own decisions on what this might ultimately mean (if it is accomplished or not). We will certainly be monitoring it closely.
With declining financial market liquidity, the stock markets will become more susceptible to economic and / or political shocks. We think that this ultimately defines the current investing market (risk is high) and is limiting investment opportunities at the moment.
And as you all may know, we (at High Rock) are not gamblers, we are managers of risk (first and foremost), so we are prepared to wait for opportunities to evolve (as higher levels of volatility create them) and remain prudently cautious (in the short term). With the knowledge that opportunities will develop (as they always have and always do) to allow us to continue to generate longer-term, strong, risk-adjusted returns:
It is also my duty to tell you that historic returns do not guarantee future returns. However, we, at High Rock, work very hard to get the best risk adjusted returns possible for ourselves and our clients (because we invest in the exact same assets as our clients and back this up with an independent Investment Review Committee quarterly report, which our clients will be receiving shortly with their quarterly summaries).
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