Displaying items by tag: volatility

(New York)

If you are looking for a sign of how bank earnings might be doing, look no further than Goldman Sachs. Goldman has struggled over the last several quarters as its trading business has failed to generate much revenue because of the broad lack of volatility over the last couple of years. However, in a divergence from the norm, this quarter is supposed to be very strong because of the volatility that has hit markets. One of the big x-factors in the earnings will be how Goldman’s proprietary investments perform.

FINSUM: If Goldman does well it will bode well for the rest of the banks, especially because other trading divisions will likely see a pick up too.

(New York)

The old fears are rising anew, and not without reason. With volatility now back in a big way, fears are once again stirring about the reliability of ETFs. In previous market flare ups there have been some major ETF losses. The ETF industry is worth $4 tn and has never been through a bear market at its current size. The biggest fears are in fixed income ETFs, where the “liquidity mismatch” is greatest between the tradable ETFs and the illiquid underlying bonds.

FINSUM: With rates and yields set to rise, there could be some volatility in fixed income, which means there could be some big issues in fixed income ETFs, especially in the most illiquid areas.

(New York)

All those worried that another bout of volatility is around the corner should definitely pay attention to Goldman’s latest announcement. The bank says stocks may drop 25% this year, but the call has one important caveat—Treasury yields would need to reach 4.5%. Goldman only thinks yields will rise to 3.25% by year-end, but a “stress test” scenario where they rise to 4.5% “would cause a 20 percent to 25 percent decline in equity price”, says Goldman’s research team. Some think stocks will rise until yields reach the 3.5 to 4% range.

FINSUM: Yields are not going to get anywhere close to that level unless the Fed goes crazy with hikes, which we highly doubt. There is a big pool of natural bond buyers in retirement age, and we think that will allow yields to rise only slowly.

(New York)

Prepare to have your eyes opened, wide. US investors have taken out $642.8 bn of loans against their stock portfolios in order to deepen their positions in the market. That huge margin debt exacerbated this month’s selloff, and is likely to make the next one even worse, as many investors will be forced to liquidate positions. The size of the total margin debt (as a percentage of total market cap) is greater than at any point since the figure started to be tracked in 1980.

FINSUM: Record high margin debt sounds like a great leading indicator for a crash.

(New York)

We are entering a period of rising rates. This is a fundamental change from the modus operandi of the last decade and represents a paradigm shift for markets and investors. Therefore, volatility looks likely to stick around for some time. Accordingly, investing in low volatility stocks, which have been shown to perform just as well, if not better, than stock market indices during periods of stress, seems like a good idea. Barron’s chooses the ten lowest volatility stocks on the market, a list which includes Aflac, Coca-Cola, Loews, PepsiCo, Berkshire Hathaway, and Procter & Gamble, among others.

FINSUM: Given the ground shifting beneath investors’ feet, having some allocation to low volatility stocks seems like a wise plan.