Volatility: Now the one certainty in this uncertain market

In the wake of the worst one-day stock market decline since 2008, most analysts and financial advisers anticipate more extreme volatility in coming weeks — but such pullbacks can also uncover bargains.
Sam Jones, president of All Season Financial Advisors Inc., sent his clients a special update last night advising a “modest increase of sideline money into investment accounts.”
Mr. Jones, whose firm manages $110 million, described yesterday’s 512-point drop by the Dow Jones Industrial Average as an “extremely oversold condition.”
“Specifically, for my own kids’ 529 plans, I will be adding a quarter of their annual allowable contribution now, or roughly $6,500 each,” he explained. “If we get some evidence that stock prices are done falling and buyers step up to buy a very cheap and oversold stock market, I will be quick to add more with the intention of getting at least 50% of my annual contribution done by the end of August or September.”
In stride with other analysts and advisers, Mr. Jones acknowledged that the markets have become extremely volatile as a result of multiple influences that have been building over the past several months.
Today alone, the Dow Jones had a 416 point gap between its highest and lowest points, bottoming at 11,139.00 around noon ET and peaking at 11,555.41shortly after the open this morning. The DJ finally closed at 11,444.6, up 60.93 points, or 0.54% on the day.
“We got through the default-risk threat, but this [market volatility] has been brewing for a while,” said Blaine Rollins, manager of the 361 Absolute Alpha Fund, a registered fund-of-hedge funds strategy from 361 Capital LLC.
“Last week everyone wanted to blame the political games being played in Washington, but now it’s all back to looking at the data,” he added.
Among the data Mr. Rollins has been watching are efforts by Switzerland and Japan to deflate their currencies this week; $8.8 billion flowing out of domestic equity mutual funds last week, and yesterday’s dramatic widening of credit spreads.
As the market decline unfolded yesterday, U.S. Treasuries gained 2% while high-yield corporate debt fell by nearly 2%.
“The spread between corporates and Treasuries gives you an idea of the risk appetite right now,” Mr. Rollins said.
Along the lines of significant data, this morning’s unemployment report from the U.S. Labor Department showed nonfarm payrolls up 117,000 — considerably more than the 85,000 jobs analysts predicted.
The latest jobs data drops the national unemployment rate slightly to 9.1%, from 9.2%.
“Today’s better-than-expected jobs report allows for a pause in the negative feedback loop between deteriorating fundamentals and horrid market technicals,” said Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co. LLC.
“The markets have been shaken by three distinct yet reinforcing realizations: the weakening of global growth, an increasingly ineffective policy response, and the spreading debt crisis in Europe,” he added. “For markets to sustainably regain their composure, they will need evidence of better policies in Europe and the U.S.”
Even if such short term positives like the unemployment report can lift the markets today, the bigger picture will definitely continue to focus on slower economic growth, according to Jason Brady, who manages $11 billion across four equity and fixed-income portfolios at Thornburg Investment Management.
“The bottom line is the market is trying to price in slower global growth,” he said. “And the U.S. debt ceiling deal cleared the way for people to go back to Treasuries as a safe haven asset.”
In terms of where the investment opportunities might be right now, Mr. Brady said even with such a dramatic decline, quality stocks have held up relatively well.
“The dicey things have been falling the most, and it’s been harder to buy quality on the equity side,” he said.

Related Topics: Alternative Investments Conference