Beware of “ Perma-Bears ” in Volatile Markets
In terms of severity, we believe that the current chaos surrounding Brexit falls toward the bottom of the list. Sure, the market reacted quite alarmingly in the first two days—as much due to the unexpected result as to the unknown full, long-term implications of the decision to exit the European Union. But we’re already seeing some stabilization following that immediate global market reaction.
The Electron Global Fund was up 2% for September, bringing its third-quarter return to -1.7% and its year-to-date return to 8.5%. Meanwhile, the MSCI World Utilities Index was down 7.2% for September, 1.7% for the third quarter and 3.3% year to date. The S&P 500 was down 4.8% for September, up 0.2% for the third Read More
And therein lies one of the preeminent lessons of long-term investing.
Corrections Often Need Corrected Vision
While it’s happening, a correction feels terrible. But despite the many corrections and spikes in volatility during this cycle (from March 9, 2009, through June 29, 2016), the S&P 500 Index hasn’t collapsed. In fact, it climbed 206%, or an annual average of about 16%, over that period (Display). In other words, all those episodes of volatility have created attractive opportunities to buy stocks. And in our view, that holds true now—perhaps even more than over the past seven years.
More recently, the markets have lost some steam. For roughly the past 12 months, the net market movement has been flat (just slightly lower after the past several days), despite increased volatility. The rising tide that lifted all boats for the past several years probably won’t help an investor’s returns going forward.
Instead of relying on market returns, it may prove more useful to keep an eye on the long term, and to look at the volatility of any particular moment with more objectivity than emotion.
Perma-Bears – Objectivity: Dull…but Good
Right now, for instance, is a good example of when to exert your objectivity. Fear is running high. Along with that, there’s a pervasive distrust of equities. But let’s look a little closer. The yield on equities is roughly 2.2% versus the 10-year Treasury yield of 1.5%. Once again, there’s a mad dash to safety assets, so the rates on Treasuries continue to fall. Yet the current situation actually creates a double positive for stocks: interest rates are likely to stay lower for longer, which helps support equity valuations while also providing investment-grade issuers with the ability to borrow cheaply and increase shareholder value.
That’s not to say there aren’t any concerns that call for caution. For example, we’re currently keeping a watchful eye on oil prices, the US dollar and credit spreads. As we evaluate these trends in the Brexit aftermath, we ask the same question that we always ask during a market crisis: “Do we want to add to stocks that are insulated from the event or do we want to go where the pain is greatest and buy some of the stocks that are getting crushed?” Right now, we believe investors should consider doing a bit of both.
In today’s environment, this can be done by maintaining higher-than-average long exposure—and tilting into the weakness that’s slammed the markets to buy specific stocks with strong long-term fundamentals. That said, in extremely turbulent conditions, we believe that investors should always be ready to optimize both long and short exposures to adapt to changes in the market.
Be wary of “ perma-bears ”—the ones who overanalyze how bad Brexit may be. Yes, global growth has already been slow. No, that doesn’t mean we should abandon equities as a whole. It just tells us that we have to evaluate which stocks we believe will fare better over the long term, when the dust settles from the latest crisis.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.