Take Volatility for Granted

“Unanimity of opinion is a danger sign. When everybody thinks that interest rates are going to remain lower or go lower, look out!” This is what Shelby Davis, the founder of an investment management firm, had to say. In fact, in our last editorial we were vocal about the fact that we are on the edge of something about to happen in the markets and therefore ‘look before you leap’ should be the right mantra for the moment. The only thing which was understated in the above statement was the word ‘something’! Indeed, a lot has happened over the last week. Here are some of the key events that took place over the last week or so.

The US’ fiscal stimulus seems a distant dream before election as Senator Mitch McConnell has adjourned the senate until November 9. The second wave of the virus pandemic is turning into a reality with cases being on the surge again across Europe and in the US. To combat the second wave of the pandemic, countries have no other option but to impose fresh curbs. Some of the European nations are planning for a repeat of the nationwide lockdown and with this the likelihood of quick economic recovery is hazy. 

Therefore, one thing is clear: unless and until we get this healthcare issue resolved, we cannot move to a new cycle of growth. This is quite evident from the fact the crude oil prices have also tumbled recently on worries over demand in the wake of the news about the second wave of the pandemic. Meanwhile, the spread of the virus in India is showing distinct signs of slowing down. On the positive side, the earnings’ season has been good till now and we are seeing green shoots. It may be too early to arrive at concrete conclusions but overall the recovery has been better than expected and as a result the Indian markets have been relatively outperforming the global markets. 

Further, India’s Finance Minister Nirmala Sitharaman stated that India may be among the fastest-growing large economies next year while addressing the Fourth Annual India Energy Forum by CERA Week. Moreover, the finance ministry is hopeful that the GST collections would cross the Rs 1 trillion mark in October, boosted by a jump in returns’ filing. We usually move in tandem with the US markets – that has been the historical pattern – but with the Indian markets relatively outperforming over the last one month on back of the above mentioned factor, for the time being one may assume that the Indian economy may have decoupled with the world. But, it is certainly not completely shielded too.

The countdown to the US presidential election has begun and the uncertainty is quite evident from the fact that the CBOE Volatility Index, known as the stock market’s fear gauge, spiked above the 40 mark, reaching its highest level seen in the first half of June 2020. It’s likely to continue its upward trajectory with a resurge in virus cases and election in the background. Hence, our advice to Indian investors and traders would be to not get frightened by this phase and also not indulge in any hasty decision-making based on what is happening in the US. Yes, it might have a short-term impact on the markets depending on the outcome of the event, but in the long run it will play on the merits of development taking place in the domestic economy.

Also, there is the fact pointed out by author Jeff Hirsch in which his chart of the election year pattern shows that whether or not the incumbent party wins, the period from Election Day to the year-end tends to be strong. Of course, this will be exclusive of some instances like the year 2008 when the global financial crisis created mayhem in the markets. Overall, investors and traders brace should brace themselves for a period of volatility. And when the market volatility hits, investors will not have the strongest willpower. They are likely to take rash decisions to fix the problem in the short term, ignoring the long term. Hence, this reminds me of a quote: “Projecting market expectations through a rear view mirror is a limiting strategy. Instead, we think harnessing business specific valuation and margin of safety tools are the only forward looking methods that deserve merit.”