How will the Election Impact the Markets?

How will the Election Impact the Markets?

Posted on November 05, 2018
Featured Video:
Our featured videos in weeks past have discussed some of the key internal benchmarks utilized by the Portfolio Thermostat.  These benchmarks are Volatility (CVI), Benefit of Diversification, and Portfolio States.  This week’s video discusses the Portfolio Efficiency Score, which ties together those 3 internal benchmarks into one composite score.  By maintaining a score of between 70 and 100, the Portfolio Thermostat is able to limit drawdowns to a normal bull market correction of about 8-12%. 

Market State 6 (Transitional): The stock market, as measured by the S&P 500 remains in a transitional environment.  This is following a period of extreme low volatility (CVI less than 45).  Over the past two weeks, we have seen a spike in volatility. This came out of an extreme low volatility period and caused the market state to change to a Transitional environment.  Most of these types of environments return back to bull market environments.  Canterbury will continue to monitor for any changes in the market environment.
Canterbury Volatility Index (CVI 85): Volatility remained flat following last week’s market movements.  On October 9th, volatility was CVI 39.  This was an extreme low volatility reading.  After the CVI spike, volatility has reached CVI 85.  When volatility hits extreme low levels, it is similar to the squeezing down of a spring.  As volatility gets compressed, it tends to eventually relieve pressure in the form of a volatility spike, up or down.  CVI remaining flat last week may indicate a reversion back to lower levels of CVI.
For whatever coincidence, it is common market knowledge that October is a bad month historically for the stock market. It is important to remember that this is just coincidence.  Markets do not understand the calendar.  We cannot predict what will happen to the market based on the month that we are in.

One thing that we know for sure is that markets have varying degrees of randomness.  During an efficient, low volatility market environment, we are less likely to experience the occurrence of “outlier days” (+/- 1.5%).  In today’s transitional environment, outlier days are more common and have come in bunches as the market tries to figure out where it wants to be.  Since October 10th, we have experienced about 8 days that would qualify as market “outlier days.”  To put this in perspective, for the calendar year 2017 (a low volatility environment), there were only 2 days that qualified as market outliers.

The market is currently 84% overbought because of last week’s rally. That means that any further upward movement should be a little slower going. As mentioned several times in the past, the day-to-day news stories do not drive the markets. News drives market noise. The amount of, short-term, market noise is primarily determined by the amount of volatility present in the existing market environment. In other words, news will have little impact on the daily fluctuations during stable markets. On the other hand, a similar piece of news can cause a 2% or 3% plus outliers during a volatile market environment.
Bottom Line
The primary current news item, that the markets will need to deal with, will be the elections results. The current volatility is high, and the market is in a transitional Market State. That means that Tuesday’s results will likely be followed by larger than normal intraday swings. Another characteristic of an emotional market is to be counterintuitive. That means that the reaction could be small, because most expect a big move one way or the other. As it stands now, any decline should be limited to a normal correction of about 10% to 12% from the peak on 9/20/2018.
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.