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The Return of Volatility


Well, that was a rougher week in the financial markets than we’ve seen in a long time. And while none of us like our account balances heading in reverse, we should welcome the return of some healthy volatility in this extended period of artificial calm. It's often volatility that creates opportunity.

Stocks, bonds, precious metals, other commodities—as well as your cryptocurrency du jour—all got taken to the woodshed this last week:

  • US stocks (SPY) dropped about 3.9%
  • International stocks (VEU) down about 4.1%
  • Long term US government bonds (TLT) hit by about 3.2%
  • Gold (PHYS) down around 1.5% and Silver (SLV) negative 4.6%
  • And hey, let’s not forget Bitcoin getting walloped by over 20%

Portfolios of SecondHalf investment management clients declined just a fraction of that and are well-positioned to weather a serious pullback (whenever we finally get one). Clients can check their own portfolio performance here.

Human nature always seeks an explanation…we want to know why something happened. That’s good, but people tend to latch onto simplistic “reasons” for explaining complex issues. And the world of investing is no exception with financial media always ready to feed us their “why.”

The truth is nobody knows for sure why there was a widespread drop in financial markets this last week. It’s most likely a combination of reasons rather than one straw that broke the camel’s back.

  • The longest stretch ever in rising US stock prices without a 3% pullback (don’t be fooled into thinking this last week was any serious pullback)
  • Interest rates continuing to ratchet up, hitting bond principal but making bond yields more attractive relative to stocks
  • Another favorable jobs report Friday, with hourly earnings rising at fastest pace since 2009 (stoking inflation worries)
  • Former Fed Chair Alan Greenspan saying that both stocks and bonds are in a bubble (I agree, but given his track record some would suggest we ignore)
  • FISA memo
  • Geopolitical tensions and the domino effect of various international economic/financial challenges

But who knows? Just maybe the trigger was John’s barber’s aunt’s dog knocked over a cup of coffee on the computer keyboard so auntie couldn’t place her E-trade sell order and everything went to pieces from there.