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Volatility, Thy Name Is Mud

Posted by kdadmin on February 3rd, 2015.

If I hear one more pundit talk about “unprecedented volatility” or “The January Effect,” I think I’m going to barf.

Let’s just be really clear about the “unbelievable” volatility that existed this past January. Have a look at the following chart. (The blue line is SPY, an ETF that tracks the S&P500. The orange line is AGG, an ETF that tracks the Aggregate Bond Index.)
Now, tell me what you see. I don’t see “Oh the Humanity!” Do you?

Volatility

I see SPY down 2.91% in a month. No big whoop. I see AGG up 1.77% in a month. Also, no big whoop. But I further see that if I had a portfolio comprised of exactly half of each of these, I would be down 1.14% in one month. Now you tell me, are you going to loose sleep over that sort of decline? I’m not.

ESPECIALLY, when unemployment is at its lowest level in YEARS. And weekly claims dropped beyond what was expected by the market. And Greece appears to be making progress with the EU. And the EU is implementing a hefty $1 trillion liquidity program like we did in the USA. And oil prices are coming back up. And retail sales are even. And GDP is solid. And the Federal Funds rate is nearly zero.

January is an earnings month, just like October, July, and April. So, typically, these months tend to be more volatile. But if you’re a long term investor, this doesn’t matter. It’s not like we’re going to see the ENTIRE economic picture change in one month; like the hysterical media would have you believe. It just doesn’t work that way. Economic cycles are not lightning fast.

That being said, The Great Recession of 2008 caught many people by surprise. It shouldn’t have. The leading economic indicators were all wonky by the end of 2007. In other words, they were no longer pointing in the direction of accelerating growth and were warning about a significant and immediate potential economic change. Being able to see these sorts of changes can help you get out of the way of major market catastrophes like this.

In order to make proper investment decisions, you need to be able to see the forest for the trees. Obsessing on one month, or one indicator, in some sort of cauldron boiling witches brew is probably a sure fire recipe for disaster. If you’d like an overall perspective on the economy at large, take a look at my last blog entry.

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