Recent Market Volatility-Key Observations from Cathrine Greven

I thought I would drop you a quick line, as it has been another torrid time on the global equity markets this last week.  I wanted to reach out to you and explain a little more as to what is going on and why.

I don’t have all the answers, but research economists I rely upon tell me that sometimes it is not necessarily one key driver but a combination of potential factors that leads to uncertainty and as a result increased volatility in markets. Historically strong market rallies have been punctuated by sell-offs such as we have seen over the past week.

The key observations are

  • This drop is part of a correction of a long run bull market (bull market means increased rates of return and share price increases).  I am told that this is to be expected (a correction) as share prices/equity valuations  have been climbing up (we are very close to where the markets fell from at the start of the GFC).  Having said that, it is not a time for panic but rather watch markets closely.
  • Prior to the start of February 2018 volatility had been declining, on the back of a host of factors such as sustained monetary policy easing globally, strong corporate earnings, continued discal stimulus and synchronised global economic Growth.  So what went wrong I hear you ask?  It all changed drastically with the start of a spike recorded on the 5th of February measured by the CBOE Volatility Index (known as the VIX), which measures the market’s expectation of volatility implied by S&P 500 index options. 
     – What does that all mean? 
     – Basically a domino effect.
    On the 2nd of Feb, the majority of European indices (index markets like our ASX) fell more than 1% so when the markets opened on the 5th of February in the US, the US Markets did the same- had a panic attack and started another huge sell off of equity stocks and naturally Australia followed suit.  Australia hasn’t yet recovered as you can see from the market chart below.  Over the last 12 months we started around the 5,761 and today it is 5,802 after falling from 6,121 on the 2nd of February.  A huge drop and one that cannot be ignore but as you can see from the chart, one that will continue to go up and down. 

  • Overseas markets have also appeared to have identified the recent stronger jobs figures as a potentially important catalyst for future inflation and as a result, this has had an impact on the US Bond Yield (what does that mean – that see basically the price of interest could go up).
  • There are a number of products in the market for people to invest in (or gamble on) and one such product is called an Inverse Volatility (ETN) or leveraged exchange traded notes, which bets on the VIX (as detailed above the volatility index that measures volatility) falling or staying low had attracted significant investments from some say one source, that had made a fortune on their investment by purchasing this product on the premise that the markets would fall, which they did, big time.  This or these investor/s cleaned up!  Now there is no such product/investment in Australia but this kind of product has an impact on the global markets and subsequently an impact on all markets.

We continue to expect further volatility in markets as some of the observations discussed, and potentially more insights are better understood over the coming weeks but at this time we have been recommended to HOLD and watch at the very least, but that depends on your current situation and circumstances and I recommend you contact Greven & Co if you have any concerns to discuss.

In times of heightened volatility such as this, maintaining your long-term in

vestment strategy aligned to your personal investment objectives is what matters most.  If you are an existing Greven & Co client, you know what that is, if you are not, then we recommend you make a complimentary appointment to discuss your needed and objections (including your investment objectives).

Here is a video I found to be refreshing in a time like this, which looks at the markets as a whole and identifies areas that are not taking into consideration and should be when determine your investment objectives.

If the media talk about another GFC, you can see the VIX of this last week doesn’t match the GFC volatility spike.  Remember the media is there to sell news and they speculate and sensationalise rather than report the facts as they are.  I’m here to give you the facts and comparison between past events to assist you in understanding what is happening.