Forgotten Volatility Featured
There is certainly no shortage of market impacting stories on a weekly if not on a daily basis.
It marks quite the difference from years past where discussion surrounded the US Federal Reserve and central bank policy being the only game town. Over the course of the last week there were details unfolding around a terror incident in London, President Trump’s push to begin the process to repeal and reform Obamacare, or even in Canada, a federal government two years into its mandate of creating a feel-good story of investing in infrastructure and ensuring a fairer economy (by their definition).
The ongoing challenge for those navigating these markets is deciphering through the noise. From the media’s perspective, and without questioning their bias, what we are witnessing is Trump’s ability to govern over these next four years. Just last week presented the opportunity for healthcare reform, on which he campaigned extensively and promised to immediately repeal, and the question if this is whether it’s a bellwether for other Trump reforms and legislation.
This is why the talk in this weekend’s press surrounds the need for a Republican coalition in order to govern. From that perspective, it seems comical how quickly everyone had forgotten the challenges Obama faced in his first couple years in office despite also having majorities in both Congress and the US Senate.
It’s also worth questioning whether the risk appetite of investors is so closely tied to the performance of the man in the White House. Despite being the headline news story for the past five months, there are other themes that were driving investment into the US dollar and US assets in the lead up to the election. We can surmise that Trump acted as a catalyst for some bullish moves higher in US equities, but I think it’s worthwhile to take a wait and see approach before we tie his performance to potential downside in the markets.
To give perspective, the S&P500 hasn’t fallen by greater than 1 per cent since October 11th, 2016. The volatility that used to be prevalent during the climb from the market depths of the 2008-2009 Great Recession is absent. There have only been 8 instances in the last year where the S&P500 fell by greater than one per cent in a day. Whether looking across Europe or the US, equity volatility remains muted and, that is why a one per cent decline might lead to a little excitement.
To digress, there is also evidence to suggest higher levels of complacency. ZeroHedge put out a piece this week that illustrated valuations and earnings ratios that highlight how these markets may be a little stretched. This alone could tell us that risk in these markets may be underpriced.
Eight years on, there have been a number of stories to explain the strength or moves higher in the markets since the March 2009 low. Ultimately, there are a number of fundamental stories that could be put together to give a bullish or bearish outlook to the markets. My longer term take continues to maintain the theme of a stronger US dollar in search of relatively higher returns. If this is the case, Trump’s ability to govern (or lack thereof) could be no more than a speed bump.