Events Can Impact Portfolios in Different Ways

Events Can Impact Portfolios in Different Ways

Posted on September 11, 2017
Market State 1 Bullish/Rational (7 trading days): The major U. S. equity market indexes were slightly down last week. The Dow Jones Industrial Average was down -0.9%, the S&P 500 (-0.6%), and the NASDAQ 100 (-1.2%). A sideways to slightly down period was expected. Here is a comment from last week’s update: The U. S. Equity markets are slightly overbought short-term and are pushing against short-term resistance at the old highs. Most likely direction from here is a sideways trading range.
Source: Bloomberg

Canterbury Volatility Index (CVI 38):  The CVI volatility remained about the same and declined 1 point for the week. We remain in a low risk/bullish market environment.

Our hearts go out to all of those who suffered damage over the weekend in Florida. Our thoughts and prayers also go out to all of those who were directly impacted by the tragic events on this day 16 years ago.
I am often asked about the possibility of a sharp market decline that could result from a low probability/high impact (black swan) event. Many unexpected events, like hurricanes, or threats from some third world country, happen on a regular basis. The financial media, and financial analysts in general, believe that short term events can have a major impact on market behavior.

Our studies clearly show that unexpected events tend to have little impact on market prices during stable bullish periods with low volatility. The Portfolio Thermostat defines these low risk periods as bullish Market States. During such times, one can expect normal or random fluctuations, in the 4% to 6% range.

The following events are some of the worlds darkest days. These events occurred during low risk, or bullish Market State environments.

September 1, 1939: Hitler invaded Poland, effectively starting World War II. The Dow opened Tuesday (following Labor Day weekend) September 5th, up 13 points. The Dow rose another 15% over a little more than the first two weeks of September.

December 7, 1941: The Japanese attacked Pearl Harbor. The attack occurred on Sunday morning, the Dow declined less than 3% the following day.

October 22-26, 1962: The event called the “Cuban Missile Crisis” could have caused a nuclear war with Russia. The Dow dropped less than 1% for the week.  

April 4, 1968 and June 6, 1968: Martin Luther King was assassinated, shortly followed by Robert F. Kennedy. April 4th was a Thursday evening and there were riots in the streets. The Dow was down less than 1% for the following day and was followed by an up week.  The Dow fell about 1% following RFK’s death and was at a higher level within days later.

January 28, 1986: The Challenger space-shuttle exploded killing the brave astronauts on board. The Dow was up 1.2% on the day and continued higher through the next month.

As has been stated before, markets are driven by the law of supply and demand. Supply and demand are driven by investors’ emotional commitment to beliefs regarding future pricing - higher or lower. Investors do not shift from being optimistic and rational enough to commit money for a purchase and then immediately turn pessimistic and sell. Shifting from a low risk environment to a high risk environment takes a period of time, and vice versa.

Bear markets do not occur at low levels of CVI, such as the current market level of CVI.  The Canterbury Portfolio Thermostat’s operating system will continue to monitor the markets for any changing characteristics, but as of right now, we remain in a Bull Market State.

On the other hand, unexpected events can have a substantial impact on market prices during transitional or bearish market environments, meaning periods when markets are already highly volatile and emotional.

Bottom Line:
The short term emotional state of the market, which is primarily determined by the current level of volatility, can give the best indication of the expected impact of an event. In other words, similar events can occur during two different market environments and the impact can be very different.
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.

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.