At the End of the Day, Market Volatility can be BullishAdvice to the Advisor
“Somewhere along the line, the word ‘volatility’ became code for a declining stock market,” Robert Burgess notes in Financial-Planning.com. “The simple fact is the recent swings are closer to what is considered normal, and investors should be thankful,” Burgess asserts. Rising volatility, he predicts, will lead to a healthier market, with better “price discovery,” which is a fancy way, he states, of saying greater differentiation in the values between good and bad stocks.
It may be time to have “the talk” with your investor clients who are exhibiting symptoms of a “market volatility fear reaction.” They’ve been inundated with “market news” on their car radios, tablets, and TVs, and, in just the first quarter of 2018, there have been three times as many days with a greater than 1% price move as there were in all of 2017. When economic statistics, political scandals, and scuttlebutt about possible trade wars are added to the mix, there’s small wonder that there’s a growing perception of high risk in stocks.
To talk them down from an “end of days” ledge, talk about end-of-day trading. Explain that there are many factors which can affect stock prices 24 hours a day, 365 days of the year. The stock market, by contrast, trades for only 6 ½ hours a day during only 240 days out of the year. In those last minutes of the trading day, traders want to close out their positions to avoid the risk of a large price movement due to news flows that happen between the close of one and the open of the next trading day. What’s more, since many option traders and index fund managers buy in the morning without making payment for their purchases, they opt to close their positions by the end of the day to avoid having to commit the funds. “The shift toward late-day trading has also increased the closing auction’s importance, where more than $10 billion worth of stocks are traded on average,” Fred Imbert, Market Reporter for CNBC, excerpted from The Wall Street Journal. Imbert goes on to say, “The data signals liquidity is at its highest at the end of the day, meaning investors can buy or sell large amounts of shares with a lesser likelihood of causing a big move in the stock price.”
And it’s those very “big moves,” condensed into minutes at market close, that create the perception of risk. Perception—now that’s the operative word, Sheaff Brock Managing Director Dave Gilreath is quick to remind us. Risk and volatility are two different things, Gilreath asserts. Investing risk entails committing resources to areas in which one has no means of obtaining information or analytics. Volatility, on the other hand, refers to upward as well as downward movements in the market.
In general, we’ve found at Sheaff Brock, investors can get into trouble spreading themselves too thin trying to avoid risk when what they really want is higher returns. Factoring in the reality that equities and securities change all the time—in price, relative valuation, yield and attractiveness—it takes active management to select and monitor the right blend of equities and other instruments over time. Volatility is the friend of active portfolio managers such as Sheaff Brock, Gilreath explains, because active managers can be better positioned to improve returns and reduce risk outside of the indices by exploiting volatility.
At the end of the day, volatility can offer active investors opportunity!