Why It's Nearly Certain That Market Volatility Will Continue
Plus, why you must switch your investment methodology to profit.
– John Quincy Adams
Just over a year ago my firm penned a piece stating that the US equity markets began, what seemed to be at the time, the beginning of the third cyclical (1- to 4-year) bear market since the secular channel began in 2000. Uncannily, this was not the case. It was merely a short-term, 20%, massive volume drawdown; but not a bear market. Cynicism aside, this event was truly something of an anomaly. To say such a watershed event, without a continuation, is a rarity would do the statement injustice. Correspondingly, the overall action since the 2009 bottom has been an anomaly; at least in comparison to the last decade.
In April of 2007 we penned an update to our 100-Year Market Theory (100-YMT) and broke down the secular channels into the smaller cyclical moves within. Since the ’09 bottom we’ve been doing further analysis and have specifically focused on the commonalities of the second-half portion of all four of the secular channels. Today we illustrate some of our findings in relation to the market's (SPX – S&P 500 Index) new normal and volatility; explicitly the standard deviation.
Click to enlarge
Illustrated in the weekly chart of the SPX above is the 2003 – 2007 cyclical bull market, the 2007-2009 cyclical bear and the latest cyclical bull move. What is blatantly obvious is the difference in volatility (standard deviation). [All standard deviation metrics/percentages use a 14-day standard deviation divided by price.] In the ’03-’07 cyclical bull there is some semblance of rationale and what we would consider typical market volatility. Yet, in the ’09 – present cyclical move, the volatility is substantially higher.
When analyzing the volatility data based on yearly averages and yearly highs, it is very easy to see the exorbitant increases. This upsurge in volatility generally typifies the beginning or the end of a trend; yet here we are, pushing into potential new yearly highs. This leaves many questioning; questioning the move, questioning when the next shoe will drop, and questioning how big it may be. The “new normal” over the last few years has been a hard pill to swallow for investors and money managers alike. The reason is risk. Risk is defined in a multitude of ways and embraces a different meaning for each interpreter. Yet risk corresponds directly to volatility.
If this is the “new normal” and the markets are to continue on this increased volatility path, there comes a time where what once worked has to be modified. Throughout the great secular bull market of 1982 – 2000, “Buy and Hold” was the steadfast way to invest. Since the fourth secular channel began in 2000, outlined in our 100 YMT, this once all-encompassing theory became the downfall of many. Now that the market has crossed into the second half of the secular channel, in our humble opinion, there is an absolute necessity for another shift in investment methodology requiring even more attentiveness and analysis.
I hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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