Is near-record-low volatility in this multiyear bull market a sign of investor complacency or nervousness? Portfolio manager Rob Lovelace offers his perspective.
Equity portfolio manager
32 years of investment experience
Will McKenna: How do you think about it, Rob? Are you positioning for higher volatilily in the future, or are you thinking there may be corrections which are kind of a natural part of the markets here that you want to take advantage of? What's your view on where we are in volatility?
Rob Lovelace: There are lots of different ways to measure volatility. And I think if you just look at the simple one, number of days with the market down a percent or 2% or 3%, we're at an unusually quiet — I think it might even be a record — year we're headed toward this year. But if you look back over the last 10 or more years, you'll actually see that this is not an uncommon pattern, and it usually isn't a sharp spike back. In other words, you would expect volatility to increase from here in terms of daily activity. But without an outlook for a recession, it probably means that to the extent we have a correction — which is down only 10% — that's more likely than actually seeing a bear market, which is down 20%.
I was just in Asia, obviously getting a lot of questions as an American there about, “Why is everyone so complacent?” That was literally the term. “Why is everyone so complacent? Why are the markets so calm?” And I said, "You know, there's nobody I'm talking to that's complacent. Everybody's nervous." And so that's the interesting part of this, right, is how nervous everyone is, how obsessed everyone is with it. And yet we're not seeing that type of volatility in the market.
So my sense is, everyone wants there to be a correction so that they can buy it. So to me, that speaks to probably an increase in volatility, but not able to ever get to a bear market, the same reason interest rates probably can't spike up substantially without inflation or something underlying it: because there's so much demand right now for people trying to find income. The most vulnerable stocks are probably those that people are buying just for the dividend and that may not be as supported by the fundamentals. And this why, interestingly, some of the higher P/E stocks may actually turn out to be better. Because they're not being bought for yield, everyone's nervous about them, but the underlying fundamentals are so good —
Will McKenna: Meaning the FANGs?
Rob Lovelace: Yeah, exactly, the FANGs and some of the other technology-related, and maybe even some of the drug stocks — that everyone's holding them so tenuously, waiting for this correction, and they'll probably get sold off hard. But everyone I know is waiting with some type of cash or in their asset allocation — whatever they're doing — to get back into the equity markets once we clean up this lack of volatility, and we're back off to the races. So it feels more like that period of buying the dips that we had for so long, and [this] generation doesn't believe that anymore, because that isn't what we've had for a decade. So maybe the old-timers have an advantage here.
Will McKenna: It does seem like a very ambivalent bull market that we're in.
Rob Lovelace: I've always called it the most hated bull market that I've seen in my career, just because all the way along, everyone wanted it to end.
Will McKenna: And the more it goes up, the more hated it seems to be.
Rob Lovelace: Yeah, yeah.
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