Market Volatility—A Sheep in Wolf’s Clothing?

Sheaff Brock | Stock Market Volatility as a Sheep in Wolf's Clothing

Market Volatility—A Sheep in Wolf’s Clothing?

“The market is as much about sentiment and psychology as it is earnings and profits,” Avi Salzman stated in Barron’s. As Salzman observed the “tit-for-tat proposals” of tariffs between China and the U.S., he realized that the fear factor was going up regarding a potential trade war. Meanwhile, stocks were also being rattled by an anemic jobs report. Salzman is reminded, he says, of “the importance of perception versus what is reality.” No tariffs have actually been approved or implemented, but that’s irrelevant. It’s perception rather than reality that drives stock market volatility. Analysts and traders get paid to anticipate and to price in good and bad news.

Certainly current volatility seems high, concedes Sheaff Brock Managing Director Dave Gilreath. Since the start of this year, we’ve seen 25-30 trading days with a greater than 1% price move in the S&P 500 Index, compared to only eight in all of last year. (2017 was an anomaly in its own right, since the normal annual volatility average is 48 days out of the 250 trading days in a year.)

While volatility in itself might be considered the normal “cover charge” for participation in the stock market, it’s important to differentiate between market risk and market volatility. Risk, Gilreath explains, consists in not knowing what you’re doing, and investing in areas you know nothing about; one hallmark of “the Sheaff Brock way,” he emphasizes, is investing only within the firm’s sphere of competence.

Geopolitics has always seemed frightening to investors, Gilreath continues—the Cold War was tremendously scary to investors in its time. If you think about it, he says, in comparison with early eras, geopolitics are relatively mild today, with more global trade going on, more democracies in existence, and fewer wars.

Riva Gold, writing in the Wall Street Journal, appears to agree that the current market volatility—and the fear response surrounding it—might translate into a positive for investors. “Investor sentiment has quickly shifted from extremely optimistic, to outright bearish—an encouraging contrarian signal for those market participants who have long worried that Wall Street was overly bullish.”

We use the expression “a wolf in sheep’s clothing” to refer something that seems to be good but is actually not good at all. Could it be that today’s stock market volatility is just the opposite—a “sheep in wolf’s clothing,” reflecting that, “in the eyes of J.P. Morgan, a healthier U.S. labor market, easy credit conditions in Europe and data indicating further equity price gains in 2018 support the idea that there’s further room to run in the stock market”?

 

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