Big problem or big opportunity?
Markets have not only corrected sharply, but with great speed. Some of the market’s exaggerated moves can be attributed to instantaneous access to information, heightened fear, and forced selling. Inflammatory headlines and negative newspaper reports with a bent towards sensationalism, means most of us are getting more than daily doses of skewed sound bites masquerading as reality.
Heightened fear has resulted in a shift away from rational thought toward emotion and an irrational response to current market action. Finally, forced selling by hedge funds and large institutional investors due to increased liquidity pressures, has introduced a bias in the marketplace that has seen more sellers than buyers – creating in effect, a buyer’s market that’s devoid of buyers.
Figure 1: S&P/TSX volatility + or – 1% daily price change
As is typical of this juncture in a financial cycle, markets have also been extremely volatile, with the volatility index or VIX level (often called the fear gauge or fear factor) reaching historic highs.
This volatility was even more pronounced as the year drew to a close, as shown in Figures 1 and 2. Market moves of greater than 1% had increased to 74% of trading sessions on the TSX and a full 85% of trading sessions on the S&P 500 by mid-December.
These levels are not sustainable and there will be a shift back. Valuations are incredibly cheap. Global efforts to stabilize markets are taking hold and will eventually bring significant capital back into play which is expected to create growth.
Figure 2: S&P 500 volatility + or – 1% daily price change
Dom Grestoni, CGA, CFP
Senior Vice-President, Head of North American Equities and Portfolio Manager
Dom is the Portfolio Manager for Investors Dividend Fund and has been with Investors Group for over 32 years.
“Fear is currently ruling the marketplace and it is only a matter of time before there’s a refocus on the facts and fundamentals.”
