Bear market volatility

Wild swings

The last couple of years have been very challenging for investors seeking value, and it has required no little patience to sit on a high allocation to cash.

US stocks are down about 20% in less than three weeks, which has afforded a few buying opportunities – including in oil stocks – for those sitting on plenty of cash.

The challenge for my personality type is to avoid getting greedy, and to keep referring back to my investment plan before acting on impulse.

The US S&P 500 had fallen from about 3,400 last month to 2,734 at today’s lows, but still the CAPE ratio was only down from 33.3 to 26.1, indicating that the market is still historically expensive.

Source: Shiller

Yes, despite all the crash headlines, markets remain expensive at this stage.

For my plan, this still demands carefully managing exposure and a heavy allocation to cash (refer back to the 8 timeless principles, including market cycles, asset allocation, and buying low).

While the wider market remains expensive, one sector which gradually looks set to offer at least some value is energy.

Crude is now pricing for a US recession, while an oil price war has seen some energy prices have moved towards the point where it might be time to put out the bucket rather than a thimble.

Elsewhere, the market remains expensive and caution is warranted.

High voltage

I’ve noticed a few younger investors questioning whether such high intraday volatility is normal.

The below chart shows the times when US stocks have experienced a gain of 5% or more in a day.

Which is to say, during the tech wreck and the global financial crisis.

During stock market meltdowns, it’s common to see the market ‘pop’ higher at various points, leading ‘permabulls’ and market optimists to declare that the worst must surely be over.

Source: Oddstats

We can also experience numerous face-burning rallies (a little like what we saw in the last hour of trade last week!).

Despite what we were taught in business and accounting school, volatility isn’t the same thing as risk.

If you have an effective asset allocation policy between stocks and cash, then volatility can be your friend, not a foe, allowing better opportunities to deploy capital.

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Published by petewargent

CEO Next Level Wealth, & AllenWargent Property Buyers, with offices in Sydney, Brisbane, & London. Leading Australian market analyst, & 6-time published finance author. For more see: Qualifications including: B.A. (Hons.) Industrial History, Chartered Accountant (FCA), Diploma Financial Services (Financial Planning), Chartered Secretary, Advanced Diploma Applied Corporate Governance.

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