Appreciating Post Cyber Monday Stock Market Volatility

Posted on November 27, 2017 by Dr. David Edward Marcinko MBA

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Living with Ambiguity [Is it Friend or Foe?]

By Robert Klosterman CFP® http://www.whiteoakswealth.com/

The stock market was down a bit last month and up last week, and then down today; back and forth, rising and falling and rising again the last few years, etc, etc.

Now: 23 557 DJIA

Whipsaw is the word I’ve heard to describe it lately. And, without a doubt, the question that gets asked the most is “How do you like this volatility?”

My reply, without exception, is “I LOVE volatility. I do prefer upside volatility to downside though”. The response is a smile or an outright laugh. Of course, few physicians or laymen I have ever met get worried about upside price movements in investing.

Third Quarter 2017

The third quarter of 2017 – post election results – clearly experienced both major up and downside volatility with the recent emphasis on the upside. Investors that fully invested in equities saw their portfolios rise in the positive and record-breaking direction.

Europe

The market pundits have a daily hero to pin the market movements on. Europe, Syria, Russia and Putin, Turkey, Greece, US Congress stalemates and other forces like the death of Fidel Castro are some of the most recent “good guys” that have given rise to Mr. Market’s positivity. Did we mention  Donald Trump?

How Long?

The bigger question is how long will these issues persist? Established societies, often described as western economies, have some significant headwinds facing them for the next few years: high debt, mounting costs of social insurance programs, and the likelihood of higher taxes to solve the problems.

There is nothing new or unique about that last sentence. There seems to be a wide consensus on those points and coupled with the record low interest rates, investors seem to have few traditional options to consider. It appears likely that it will take a few years to resolve these issues and provide a platform for above average growth.

Strategies

There are a number of strategies that can utilize volatility including Long-Short, Mean Reversion, Managed Futures and Market Neutral, etc [previously noted on this ME-P]. These provide returns in a secular bear market that may continue for a few more years.

Link: https://medicalexecutivepost.com/2007/11/28/what-is-a-market-neutral-fund/

It’s also important to recognize that while the US and Western Europe maybe having to face the headwinds there are economies in parts of the world that will likely experience above average growth rates for the next few years. For the most part, these emerging markets include Brazil, Russia, India and China (BRIC). A strong dollar not-withstanding.

BRIC Analogs to the USA

In the 1870‘s, the US was an emerging market the same way the BRIC economies are today’s emerging markets; developmentally analogous. Whereas the US and Western Europe face many headwinds, some of these emerging economies actually have wind in their backs. Trade surplus, demographics, low debt and low cost of Government are some of the key advantages. These countries’ standard of living is changing to the positive, and they have a large percentage of their population that can move up and be a purchaser of goods and services where previously they could not.

Income Generation

Another important focus will be on income generation. For many years the income portion of an investment in equities was half or more of its return. Only in recent years has the largest portion come from capital gains. We are likely “back to the old days” in order to achieve returns that will offset inflation and meet longer-term investment goals

Opportunities exist in a variety of areas, including real estate, Mortgage Backed Securities, Private Equity and others to have more focus on income as a dominant portion of the total return.

Assessment

Volatility is going to be with us and it would be wonderful to have the confidence needed to say the emphasis would be on upside volatility, but that is not the case right now. The optimum strategies are to align portfolios with the world we live in today.

IOW: Doctors, medical professionals and all investors must learn to “live with ambiguity.”

About the Author

Robert J. Klosterman® has been listed as one of the Top 250 Financial Advisors in the United States by Worth Magazine. He has also been recognized as one of the top 150 Financial Advisors by Mutual Fund Magazine, Medical Economics and Bloomberg’s Wealth Manager Magazine. Bob’s published quotes appear frequently in dozen’s of local and national publications, including USA Today, the New York Times, Minneapolis Star Tribune, CFP Today, Barron’s and Fortune.

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Conclusion

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THE REAL BLIZZARD OF 2016 FOR STOCKS

Posted on January 29, 2016 by Dr. David Edward Marcinko MBA

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On Mean Reversion

Michael-Gayed-sepiaBy Michael A. Gayed CFA
[Portfolio Manager]
www.pensionpartners.com

Mean reversion is perhaps the one and only constant when it comes to markets and life.  Mean reversion is as old as the Bible – he who is first shall be last, and last first.  We go from 75-degree weather on Christmas day, to one of the most historic blizzards on the east coast ever nearly a month later.

Somehow, nature (and markets) return to balance by moving from one extreme to the other. Mean reversion is dependable, but tough to remember when living in the extreme.  This is so because it is hard to imagine that everything can change in the not-too-distant future.  When dealing with markets, study after study concludes that if you take the worst performing asset classes, country indices, or strategies over the last three years, the next three years tend to be very good ones.

Fund Flows

Yet, in looking at fund flows for those areas, inevitably most exit those investments towards the tail end of that cycle which did not favor those particular investments. With volatility on-going, it is worth asking if we are on the cusp of a mean reversion moment in quite literally everything.

The iShares MSCI Emerging Market ETF (EEM) is down 8.8% year to date, with the iShares China Large-Cap ETF (FXI) down 12.92%.  Looks like a crisis, until you look at the performance of the US iShares Russell 2000 ETF (IWM) which is down 9.98%.  Emerging markets more broadly are actually down less than the average small-cap US stock despite continuous hammering of the idea that a global slowdown and fears over China are the source of market volatility. The narrative lags reality, no different than how money flows lag in response to changing cycles.

The real blizzard in 2016 is one of significant mean reversion

There are major investment themes which can change this year.  First and foremost is the theme of passive over active.  For the past several years, passive investment vehicles have been all the rage as ETFs of every stripe came out, allowing for more index allocation options.  Indeed, indexing can be a strong strategy, but what is forgotten is that as more money goes into passive strategies, the less money there is taking advantage of active anomalies and opportunities.

Mean reversion here suggests that we may be entering an environment where passive investors don’t perform as well as they had, as new momentum opportunities and risk-off periods allow for tactical trading to really shine beyond the small sample. Whether stocks have bottomed or not is irrelevant for now.

The greatest opportunities will come from 1) avoiding or minimizing the impact of more frequent corrections in stocks (not one week extremes like the start of 2016), and 2) positioning in reflation trades through commodities and emerging markets which have been left for dead as being investable.

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Bell Curve

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Should mean reversion begin to take hold this year, betting against those areas can result in significant loss.   Investors in those areas now are suffering and doubting their investments, which may be precisely why tremendous money can be made.

Assessment

As 2016 unfolds, we will continue to address these potential opportunities in our writings (click here to read).  The thing about the future is that it’s hard to predict what happens next…except at extremes.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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