Markets Will Fluctuate, That is a Fact

Markets Will Fluctuate, That is a Fact

Posted on September 06, 2022
Markets will fluctuate, that is a fact.  Different market environments will experience different levels of fluctuations, called volatility.  In a low volatility bull market, you are more likely to experience marginal fluctuations that might lull you to sleep.  That is not the case in a bear market environment, like the one currently being experienced in both the broad equity markets and bonds.

The Market

The S&P 500 is trading below both its 50-day and 200-day moving averages.  According to our indicators, volatility, as measured by the Canterbury Volatility Index, measures CVI 111.  As a reference, volatility above CVI 75 for the market is considered high.  The current volatility of market is below its high for the year but has started to tick back up as the market has fluctuated downward over the past few weeks.

Here are some quick market (S&P 500) statistics for 2022 that you may find interesting:
  • There have been 171 trading days this year (through 9/2/2022).  Of those days, 75 have been up (43%) and 96 have been down (56%).
  • The average trading day has resulted in -0.11% for the S&P 500, and average “up” day has actually been greater than the average “down” day.  On average, a day that has ended positive has been up about +1.2%.  A day that has ended with the market going negative has been -1.13%.
  • Intra-day volatility has also been high.  On average, the difference between the daily high and daily low has been 1.84%.  That is nearly double what we saw in 2021.  In other words, on a daily basis, the market may have gone from being down almost 1 percent to being up almost 1 percent or vice versa.
  • So far in 2022, we have seen 9 swings of at least +/-6.00%.  In other words, the market has had a run or decline of at least 6% nine different times this year.  For reference, through this point in the calendar year 2008, the market had 8 of those swings.  In 2021, the market had no drawdowns totaling -6%.
  • The market’s swings in 2022 have been large.  So far, the S&P 500 has seen a few declines of -9%, -15%, -12%, and most recently -8.85%.  It has also seen a few rallies of +11%, +7%, and +17% (pictured below).

Source: Optuma Technical Analysis Charting Software

What about Bonds and Conservative Portfolios?

Talk about volatility. What about the bond markets?  Bonds are supposed to be the safe asset that will cause a balanced portfolio to be less volatile than stocks.  Well, contrary to conventional wisdom, bonds have not been safe.  The 7 to 10-year treasury ETF (IEF) is down -12% so far this year.  The 20-year treasury ETF (TLT) is down nearly -24% on the year.  From their peaks in 2020, they are each down -18% and -36% respectively.

What have bonds done for the “conservative” investor this year?  Certainly not offset risk.  One “conservative” portfolio ETF, which has a balance of 70% bonds and 30% stocks, is down -14% on the year.  That is almost down as much as the market.  So, bonds have done very little to reduce portfolio risk and have attributed to it.  Additionally, if interest rates were to continue to increase, bonds could only continue to decline.  

The Short-Term

Given the market’s recent fluctuations, the S&P 500 is short-term oversold.  The index has seen nearly a -9% decline in just 13 trading days.  The equity market’s leadership has been defensive.  According to our risk-adjusted rankings, the top sectors in the market right now are Utilities, Energy, Consumer Staples, and Industrials.  Communications and Financials are ranked at the bottom of the sectors.

Here is a fun game.  Given all the equity ETFs out there, whether it be sectors, industries, countries, or geographic regions, and all the alternatives to equities such as bonds, commodities, or currencies, what do you think the number one rated asset is on a risk adjusted basis?  We know equities and bonds are generally volatile right now, but energy stocks have done well and so have a few commodities, but the number one rated asset has actually been the US dollar.  Inflation has certainly gone up, but relative to other currencies, the dollar has been strong.

Bottom Line
The markets and bonds have been heading in the same direction at the same time in 2022: down.  We showed the various fluctuations seen in the markets this year.  We know that each fluctuation has been drastic and occurred quickly.  The big question that lingers is “what can you do about it?”

Bottom line, no one can control the markets movements.  Our goal as portfolio managers is to limit your portfolio’s fluctuations and maintain portfolio efficiency.  We want to keep the portfolio in a tight range, and not see the large swings that the markets have experienced on both a daily and weekly basis.  If we can accomplish this, through limiting declines to a normal range and capturing some of the market’s upward momentum, the portfolio will have a better ability to compound. 

Our adaptive process, the Canterbury Portfolio Thermostat has limited portfolio volatility in 2022.  It has done so by adapting its holdings to both the market sectors and asset classes that are highly ranked on a risk-adjusted basis.  It has holdings such as Utilities, Energy, and Industrials, as well as the US Dollar and Inverse Financials.  As the market environments begins to change, it will continue to make adjustments for whichever environment comes next- bull or bear.
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.