Whenever serious volatility strikes, investors get very nervous and don’t know how to react. One of the big questions is should I stay in the market? The other is which assets should I buy? Surprisingly, there is a fairly simple solution to handle volatility: every time the market moves wildly, hedge your portfolio with cash and/or options. When the markets calm down, unwind the hedge. Returns on stocks have actually been historically strongest during periods of low volatility (not the opposite).
FINSUM: The most interesting aspect here is that studies show that market returns have been highest in low volatility periods. Many people think that you have to stay in the market during volatile periods to make great returns, but that is simply not the case.
Economic data this year has mostly surprised to the upside. However, recently, things have started to disappoint. For instance, Citigroup’s basket of economic indicators has fallen to its lowest level since the Financial Crisis. Even the Atlanta Fed is bearish, recently forecasting GDP at 1.6%. Bond King Jeffrey Gundlach agrees, saying he believes the odds of a recession in the next 24 months are “very high”. He believes the chances of a recession within 12 months are 50-50.
FINSUM: We think Citi’s indicator is definitely overstating the situation. However, there are legitimate concerns about the economy, especially if you start to consider the possible implications of a trade war.
Here is a mundane but important question: what is the best single fund to track the whole market? There is now a wealth of options, from Fidelity’s free index tracker all the way to popular, but more costly SPY. The answer to this question is not as straightforward as one might think, as each of the funds has its own characteristics. For instance, while Vanguard’s VTI is popular, it has a quirky structure that can boost unrealized gains. It is also harder to trade without fees. Fidelity’s zero fee index mutual fund is a good choice, but only available on its own platform. Blackrock’s ITOT might be the best choice overall when considering fees, performance, and availability.
FINSUM: For being considered “vanilla”, there certainly are a lot of different flavors of index tracker these days.
For many years the prevailing mantra in the equity market had always been “buy the dip”. Every time the market fell, investors bought the dip and encouraged others to do so. However, that approach seems to have disappeared in the carnage of the last couple of weeks. Whereas falls used to be followed by rallies that pushed the market higher, the last few weeks has been characterized by more sustained losses with shallower rallies. Nordea Asset Management’s chief strategist sums up the mood change well, saying “We’ve seen a shift from buying on dips to selling into strength … We’re increasingly moving from glass half full to glass half empty; that’s the narrative here”.
FINSUM: We think that view sums it up well. While we do believe stocks won’t enter a bear market right now because earnings and the economy are solid, we sense that something in investors’ psyches has fundamentally changed.
As many might have seen in our publication yesterday, ETFs set a new record for annual inflows last year despite the market turbulence. This piece looks closely at the data and comes up with five key takeaways from it. Firstly, international ETFs took in nearly half of all inflows. Secondly, the S&P 500 Trust (SPY) saw its biggest outflows ever as hot money left the sector. Though at the same time, the ETF market expanded very strongly despite it. Thirdly, low-cost and smart beta ETFs took up the extra “slack” that big ETFs like SPY left, growing strongly. Fourthly, leveraged ETFs grew twice as fast as ETFs as a whole, showing a robust expansion. Finally, BlackRock’s IShares upset Vanguard to take in the most assets this year.
FINSUM: We find the ETF market very interesting and this is a good piece which covers the major changes that occurred in 2015.