Dealing with a Highly Volatile Environment

Dealing with a Highly Volatile Environment

Posted on July 08, 2020
The S&P 500 index finished the month of June up +1.8% from where it started the month.  Just looking at the numbers compared to the previous few months, it would seem like a pretty boring month.  The reality, however, is that although the month finished up +1.8%, there was a lot of volatility taken to arrive there.

Believe it or not, in just the first 6 trading days of June, the S&P 500 rose +6%.  This was near the tail end of what we called “the dash for trash”, or investors piling into stocks that had previously gotten slammed.  On June 11th, the S&P 500 experienced a -6% down day.  The Russell 2000 dropped over -10% in just two days.  Overall, one-third of the trading days in June were “outlier days.” In other words, one-third of trading days were beyond +/-1.50%.  One out of every 3 days was beyond +/-1.50%, yet the market barely moved anywhere.  Now that’s volatility.  In this kind of environment, controlling portfolio volatility is crucial.

Market Comment
In past updates, we have shown how Technology and Healthcare have led the markets throughout the recent change in market environment.  Now let’s take a look at where strength has not been: Value stocks.  

Growth and Value companies are fundamental definitions.  A growth company is one with high expectations, or in other words, highly priced stock with low company earnings.  Value stocks are usually well-established companies that have already shown growth in the past and now have the ability to generate steady profits.   Growth companies are generally considered more risky, whereas value stocks have perceived less risk.  The technology sector is considered by and large as a growth sector.

The chart below shows large cap stocks as a whole (both growth and value) compared to large cap value, mid cap value, and small cap value:

Source: AIQ
As you can see in the chart above, the S&P 500 (large cap stocks) has substantially outpaced value so far this year, meaning growth stocks are carrying the index.  Year-to-date, large cap value is down almost -17%, mid cap value is down -23%, and small cap value is down -26%.  While many major indexes appear to be closer to their February highs, this is largely attributed to growth stocks.  Value stocks have been struggling.

Bottom Line
It can often be easy to get caught up in month-to-month data.  What did the market do last month and what will it do next month?  These are all just arbitrary points in time.  Markets often do the opposite of what most investors expect.  When investor sentiment was at its low in March, the market rallied.  No one could have predicted the pace and extent of that rally, but here we are.  Now, where will the market go from here?

Wherever the market’s pricing is right now is not relevant.  It did not make sense that the market would have had -34% drop coming out of a low volatile environment, just like it would not make sense that the Nasdaq is at an all-time high and the S&P 500 isn’t far from one.  Volatility is still very high, meaning that the market is highly irrational, and therefore investors are moving in a herd-like fashion in the same direction.  Any move in the market is not sustainable, and the market will not remain there for long. Volatile markets are full of short-term rallies and sharp drops.  Investors will often be wrong in their feelings towards the markets.  Remember, volatile markets “slide a slippery slope of hope.”

Right now, there is only one way to deal with this highly volatile market environment, and that is our ability to control and stabilize the portfolio’s volatility.  Given all the outlier days that have occurred, can the volatility in your portfolio be controlled, and therefore remain stable throughout this crazy market environment?  Any other approach will leave a portfolio vulnerable to the wild swings in the markets and not benefit from the volatility. 

In volatile markets, different asset classes will have periods of going in and out of favor.  Volatility will confuse the masses.  There will be periods where one asset class substantially outperforms, only to turn around and be the worst performer in the next month.  In order to benefit from this kind of environment, you have to stabilize your portfolio and benefit from the fluctuations in both directions.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.