Market Volatility: Causes and Next Steps

World jitters, behavior, economic data all contributing factors

Troy, MI October 14, 2014 – “October of 2014 has been an interesting month so far, just in the first eight trading days the Dow Jones 30 industrials have moved (up and down) over 1,400 points. That is significant volatility, especially since the movement tends to oscillate. What are some of the causes, and what do we do? We could attribute this to a variety of causes.” says Leon LaBrecque, JD, CPA, CFP, CFA.

Ebola
“Ebola is a significant problem, both from a pandemic and economic standpoint. Western African nations stand to lose possibly more than $32 billion of economic growth. The S&P 500 lost about the same amount on October 9th,” says LaBrecque. “One person has died in the US and three in the EU. The death rate is bad, but is 0.000001% of the world population. This outbreak started earlier this year, and the market seemed to shrug it off. Ebola is sinister, but maybe not the major fear driver.”

ISIS
“ISIS is a significant problem, actually more deadly than Ebola. ISIS has killed, by reports in July, over 5,600 civilians in Iraq alone,” continued LaBrecque. “And, like Ebola, ISIS seems to be spreading (and possibly treatable), with a couple of billion dollars, tens of thousands of fighters and our military hardware. ISIS is a fear driver.”

North Korea
“North Korea? Haven’t heard anything from them. That’s exactly the problem. We haven’t even seen little Kim Jong-un since September 3. Is he around?”

Mario Dragi
“Now we may have something. The head of the European Central Bank (ECB) promised he would take all steps to get the EU out of recession. However, all steps appear to involve only talking,” says LaBrecque. “The ECB has not engaged in any serious monetary policy. As a result, we’re now seeing signs of weakness in the German manufacturing economy. Maybe we can remember when the Grecians didn’t have a formula. Right now, it’s possible the ECB doesn’t have one. Definite headwind.”

US Economy
“Back to good news. The US economy saw a drop in unemployment and the dollar is rising. Exports are up, bankruptcies are down,” continued LaBrecque. “Business optimism is up, but business confidence is down. The bellwether consumer confidence is up, as are retail sales and consumer spending. The US economy is providing a nice tailwind.”

...recognize that volatility provides the opportunity to rebalance and re-price and more importantly, to let markets regroup

Interest Rates (US)
“I only say US because the bond market is kind of silly right now. The 10-year Spanish bond is at an all-time low yield, lower than the US 10-year, which is at a 15-month low,” says LaBrecque. “By way of reference, Spain’s GDP is shrinking at a rate of 1.2%, compared to the US’s growing rate (2.9-4.65%, depending on how you measure it). Spain’s unemployment rate is 24.5% (versus our 5.9%). Yet those Spanish bonds are considered lower risk? The simpler reason is that our Fed is ahead of the European’s, already tapering their bond buying, and trying to get our rates higher, which is good for everybody. The threat of inflation is modest, compared to the benefits of somewhat higher interest rates. This is a tailwind.”

Elections
“TV advertising will be off significantly after November 4; the outcome will probably be rather anticlimactic. As long as there is rancor in Washington, the sequester forces the deficit to be reduced,” says LaBrecque. “I predict continued gridlock; election results are probably a non-factor.”

“World jitters, behavior, economic data, are all contributing factors to the volatility,” says LaBrecque. “When this happens, recognize that volatility provides the opportunity to rebalance and re-price and more importantly, to let markets regroup. My take is that global GDP is still growing at about 3.3%. Inaction by the ECB can (and probably will) turn into action. The US is still continuing to slowly grow, but grow it will. ISIS and Ebola are sinister, but solvable threats. The glass is half-full. Maybe tomorrow it will be half empty. In my research, all downturns are followed by upturns.”

 

 

 

Leon C. LaBrecque is the managing partner and founder of LJPR, LLC, an independent wealth management firm located in Troy, Michigan that manages $655 million in assets (as of 5/30/2014). Leon is a practicing attorney, CPA, CFP® and CFA that has specialized in servicing individuals, families, and small businesses in the areas of financial, estate, and tax planning for over 32 years.  Connect with him by e-mail: [email protected].