Volatility can be a Tricky Thing

This time it took only 10 trading days. Last time, in November, it took 30 days, and over the summer it took 44 days. In each case, this is the amount of time it took for the Dow Jones Industrial Average to regain all the losses from its stumble. (If you have a subscription to the Wall Street Journal, they talk about this whipsaw volatility in depth:  http://goo.gl/zpamFw)

While the first half of December is typically a time of selling in the stock market for tax reasons, and the second half usually sees a rally of around 2%, the sharp volatility we experienced has been increasing as the year goes on. One explanation is the lack of market-beating returns by mutual fund managers: 85% of which have failed to beat the market this year.  What we saw in the rally last week is a rush to get some last minute “alpha” in the hopes of catching up.

Another large pool of equity managers is the hedge fund community. Depending on which index you use, they are up as a group by only 2% this year (according to Bloomberg), to aggregate losses in most categories (hedgefundresearch.com). Either way, that is a large pile of money looking to explain why they have not made much money this year.

We were spoiled with a rapid rise in US stocks the past few years. That rise is causing significant fractures in the institutional money world. Going forward, we are likely to see increased volatility like we saw in December. Keep in mind, during 2008, we saw single-day stock market losses that equaled the entire market gains from the first 9-months of this year (8 percent in each direction)…  Volatility can be a tricky thing.

 

David Matias

Managing Principal
Vodia Capital, LLC