Displaying items by tag: volatility
Small caps are in a major rut. The Russell 2000 peaked in August and is now on the verge of a bear market since then. Interestingly, small caps have fallen farther than their larger peers despite the fact that they are insulated from headwinds like the trade war. So how to pick them? The answer is to stay away from indexes and actually choose individual shares whose fundamental outlooks appear brighter than benchmarks. For instance, one fund manager says that investors should choose “quality value stocks” with “with high free-cash-flow yield, low net debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda, and below-market volatility”.
FINSUM: Small caps are a hugely diverse sector and some shares will inevitably have bright outlooks no matter what else may be going on in the market. The issue, of course, is the time and selection necessary to find such shares. Perhaps actively managed small cap value funds are a good bet?
One of the guiding mantras of the markets since at least 2015 has been to buy the dip. The generally idea was that the market was on an upward trend, so every little downturn presented a good buying opportunity. One of the big problems with the markets right now is that such dip-buying has all but evaporated. With a trade war raging and a recession on the horizon, investors have lost faith that the direction of the market is upward, which means each dip now represents additionally downside risk instead of a buying opportunity.
FINSUM: That core belief in the direction of stock prices has been badly shaken and it is hard to imagine it will return any time soon.
The market is in its toughest position in recent memory. Numerous headwinds, none of which are easy to resolve, are stacked against it. Wit that in mind, banks are starting to publish their doom and gloom outlooks for 2019. Nomura has identified a number of “grey swans” (not black) which could topple the market next year. Some of the most interesting risks they identified included a European debt crisis sparked by Italy, oil plunging to $20 per barrel, the end of populism, and an “inflation sonic boom”.
FINSUM: To be honest, we think these are all very unlikely. What is much more likely is a recession accompanied by a trade war.
The market has been very bearish lately, with last week seeing the worst declines for the S&P 500 since march. The market fell 4.6% last week. This may seem like just another bout of volatility, one in a series we have had this Fall. However, the market’s fear gauge, the VIX, suggests that this selloff is different. The VIX just recently hit levels close to during October’s rout, but what is different this time is that it has sustained its momentum in a way that hasn’t happened since 2016. “This shows that unlike October, investors no longer see the market correction as a temporary dislocation, but rather driven by more persistent macro risks”, says Credit Suisse.
FINSUM: The market is continuing to reflect a comment we made yesterday—that the problems plaguing stocks are not simple to resolve, so is easy to see how prices could continue to fall for some time.
This market is going against all precedent. December is usually a strong month for stocks, with momentum usually dominating trading. However, everyone knows this month has been brutal, continuing the strong volatility and losses that have plagued the market since October. The same old problems are dogging the market too—rising rates, a trade war, and the threat of recession. What has really gotten worse is that part of the rate curve has inverted, which seems to have really spooked investors globally. Last week the S&P 500 saw it worst performance since March, falling 4.6% for the week.
FINSUM: Here is a question for our audience: what is going to stop this market from falling? There are so many factors pushing the market down, none of them easy to resolve. This makes us worry that there is no floor on prices right now. Even the Trump-Xi “truce” didn’t save things.