A post to Exponent Philanthropy's blog

Bracing for Market Volatility

For the past few years, investors have enjoyed a long period of relative calm in the markets. In recent months, however, market volatility has begun to rear its head.

This volatility can naturally be unnerving, but one must remember that volatility is, in fact, a normal part of the investing cycle. Those of us that make a habit of looking at historical market data were not caught off guard by this return to volatility. Indeed, we have been preparing ourselves and our portfolios for precisely this moment.

An important question is, Were the market lows of December the bottom? Is it time to get back into the market? First, know that market bottoms can take two shapes. A V bottom is a market formation in the shape of a V where prices go down for a short period only to immediately reverse direction and return to the market highs. A retest is a period of market prices going down, interrupted by a temporary hike in prices, only to shift back, or retest, to the initial low.

What’s an Investor to Do?

In history, we find the following fact: Bear markets that were not associated with a recession all had retested lows except for one instance (1976–1978) where there was a V-shaped bottom, but this was after 379 trading days from the peak (source: Factset, Knowledge Leaders Capital). So one must ask, were the market lows of December a V bottom, or will we witness a retest to the lows? History would seem to suggest the current market landscape to be correlated with a retest of the low.

To better understand the shift that is currently taking place in the markets, consider the following metaphor. Let us assume there are two parties happening at a particular office building. One party is winding down. The chairs are being packed up. The staff is cleaning up. This party features growth investors—that is, momentum, high-beta, high-volatility investments. It also features mostly U.S. domestic investments and very little international investing. The environment for this party is quantitative easing, lower interest rates, an accommodative Fed, and low inflation.

On another floor of the office building is a party just starting up. It features value investing—that is, more thoughtful, fundamental analysis; more international investing; more emerging markets; more inflation; and more volatility. We also are seeing more commodities and more real assets such as lumber, agriculture, gold, and silver.

The 2019 playbook is one where we consider both parties—one wrapping up and another we are beginning to move capital toward. For an active investor, this shift towards more volatility is a good thing because we are able to put assets to work at opportune times. One needs to be more wary of the risks to passive investing (something I spoke about at Exponent Philanthropy’s 2018 National Conference in Philadelphia—contact us here to learn more about that talk).

As financial stewards we must remain vigilant of such shifts in the marketplace if we seek to fulfill our obligations as fiduciaries.

Peter J. Klein, CFA® is president and chief investment officer of the Claire Friedlander Family Foundation. Peter is also a managing director/partner of Klein Wealth Management at Hightower Advisors and the author of two well-regarded books: Getting Started in Security Analysis and A Passion for Giving: Tools and Inspiration for Creating a Charitable Foundation.

Klein Wealth Management is a group of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

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