Earlier this month, the Nasdaq Index moved about 10% in one week. Not exactly for the faint of heart, or for the individual watching the market and their money every day.
Have you noticed lately how fast the market’s moves can occur?
For example, in the month of March, the average daily move in the S&P 500 index was 5.2% per day – the largest average daily move in a market for a month in history. The record had been 3.9% per day set back in the 1920s.
A few reasons the markets can move so quickly these days…
Algorithms and Derivatives including futures, exchange traded funds (ETFs), and options can impact the market’s moves. Derivatives can act as an accelerant either up or down as they have a multiplying effect. Essentially providing the investor with the ability to do more with less and to be able to change direction quickly. And of course algorithms are programmed into computers using data and rules to adjust direction.
So why have markets continued their move up?
In addition to fast moving markets, as the pandemic and recession was in full force, markets started moving back up. And this upward momentum in the stock market occurred and defied some investor sentiment. One reason, we think, is that markets movements have been anticipating earnings comparison of the previous quarter to be better in the future.
Also during this time, M2 money supply has grown by about 20% and the Fed’s balance sheet has grown by nearly 70%. Some of this money likely found its way into the stock market. Yet, at the same time, both business and personal savings rates have increased.
September is historically a volatile period for the markets.
This September is proving to be no different. Pensions have already begun engaging in what’s known as their quarterly rebalancing. This rebalancing occurs when pension funds have success in an asset class and that asset class grows beyond their prescribed mandate of weighting. The most recent quarter left many pension funds with an overweight in equities. So, a rebalance from equities to bonds or other asset classes has begun. Interestingly, there could be as much as $200 billion of equities sold by U.S. Pension funds, the Norwegian Oil Fund, and the Japanese Government Pension Fund, notes JP Morgan (Barrons-Sept. 20, 2020). This would be the largest rebalance since the pandemic began.
The future of investing…
We have been in a period of time where change and innovations are rapid. And this period began well before the pandemic. During the past 10 years both Growth and Momentum have been factors of investing that have outperformed other factors and the broader market as a whole. The future is upon us. Investors need to be mindful that rapid change and new innovations are likely to continue. As this occurs, potentially more shocks to the markets will also occur. Again, not for the faint of heart.
The Federal Reserve indicated this past week that it expects to keep its overnight federal-funds rate target at a rock-bottom 0% – 0.25% until 2023, Forbes. So consider, where will investors earn the income they need to live on in retirement? How will Pension funds earn their typical mandate of just north of 7%? The dividend yield of the S&P 500 Index is currently about 2%. This yield is versus the 30-year Treasury Bond which is currently at about 1.45%. It’s possible that more money could flow into stocks in an effort to meet income needs and/or to help pension funds meet their mandates.
A path forward for investors will most certainly include a more thorough check on risk tolerance, risk budget, needs, comfort levels. And as always, your goals for your money are of primary importance when investing. Keep in mind that above all, your own personal ‘risk budget’ is the compass by which you should be guided when investing.
We are providing information from sources that we believe to be reliable. Lenity Financial, Inc. cannot guarantee their accuracy. All information is as of the date of this writing and subject to change.
The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.
Barron’s – Up & Down Wall Street – Sept. 21, 2020
Board of Governors of the Federal Reserve System – Sept. 16, 2020
Federal Reserve Bank of St. Louis (FRED) – Sept. 7, 2020
U.S. Department of the Treasury – Sept. 18, 2020
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