After yesterday’s broad selloff I wanted to send a quick note helping valued investors like yourself put this into context. Although we are seeing a strong rebound today, the question remains “is the volatility expected to be more frequent ahead?”
The recent return of volatility, which started last Friday, is not so surprising and does not change our longer-term view that the bull market has ample room to run.
First, we have entered the second year of this bull market in March, and history shows that these tend to be positive, yet volatile (see table below). Year one is where the easy money is made (the S&P 500 returned over 70% between March 2020 and March 2021), while year two can be frustrating, but not fatal.
Second, volatility was kept in check since last November. While the second half of 2020 did bring some near-corrections ( -9.6% in September, followed by a rebound and another drawdown of -7.1% in October), it has been largely smooth sailing since then. Since WWII, the S&P 500 has went through corrections of 10% or more every 9 months on average, meaning that bursts of volatility, although never pleasant, are part of the drill for long-term investors. These phases are frustrating, and unless they turn into bear markets, not fatal.
Given the background of ample liquidity, still generous fiscal policies, and with consumers still flush with savings, we do not anticipate a recession over the next few years. With central banks clearly on the sidelines, the usual suspects for a bear market are clearly held at bay.
This return to volatility and profit taking had become more probable recently, when looking at stretched positioning going into the low liquidity summer environment, and how the ratio of global stocks to bonds had become stretched. It doesn’t take much in July or August in terms of negative news to shake the markets. This time, the resurgence of COVID cases (largely concentrated in the young and/or unvaccinated population) was a prime candidate for a shift to a more cautious stance.
It is not the rise in cases per say that are of concern, but the reaction of governments to the rise in cases. Although things can always move quickly in politics, the signals sent by authorities is that with vaccination being such a success, the odds of shutting down large parts of the economy are low this time around. We would of course be more concerned if the narrative changes, or if we learn of the emergence of a worse variant than the delta one.
My take is that the markets were probably due for some profit taking, and that any correction will simply be another buying opportunity at this point. Don’t hesitate to reach out if you have any questions and please feel free to share my comments with any of your friends or family. Always happy to help!