Down. Up. Down. Up. The stock market pretty much lost its marbles judging by the wild swings in the hours leading up to the European Central Bank’s policy announcement, and the hours after it.
Just consider this: Futures on Germany’s benchmark DAX Index jumped from around 9,700 before the news came out to within a whisker of 10,000. Then they plunged a whopping 600 points to 9,400 in just a few hours. Then investors decided things weren’t so bad after all, and futures rallied back just over 400 points to 9,800.
|The markets are set to get even more volatile.|
We’ve seen similar crazy volatility in U.S. stocks … government bond markets here and abroad … foreign currencies … and other assets. And it hasn’t just been over the last couple days, either. Many of the most extreme, junkiest of the junk stocks are going completely nuts.
The troubled shipping company Eagle Bulk Shipping (EGLE)? It traded for just over 40 cents in mid-February. Then it skyrocketed to as high as three-and-a-half bucks in just the first couple days of March. After that, it reversed course and plunged all the way back to a buck-thirty.
The steel firm AK Steel Holding (AKS)? It traded for around $1.60 in January. Then in early March it went ballistic, tagging $4.20. That’s a 163% gain in just a few weeks.
Then you have a whole slew of beaten-down energy names. Whiting Petroleum (WLL)? From around $3.40 to $9 in the blink of an eye. Seadrill Ltd (SDRL)? From around $1.70 to $7.50, then back to $3.50 in a span of two weeks. Chesapeake Energy (CHK)? From $2.50 to as much as $5.70 then back to $4.80.
|“We’re in a whole new market environment — one marked by increased volatility, increased uncertainty, and increasing turmoil.”|
What does it mean? It confirms we’re in a whole new market environment. One marked by increased volatility, increased uncertainty, and increasing turmoil — on both the way down AND the way up. It smacks very much of other down cycles in credit, where the “crisis/policy response/crisis” process would play out over and over again.
My favorite coping strategies? Keep a higher percentage of your portfolio in cash and cash-like investments. Own some crisis insurance investments like gold. Use sensible hedges.
Also stick with stocks that offer generous yields — but make sure the underlying companies can actually afford to pay those yields. Focus on sectors with less economic sensitivity. Buy non-stock investments in fixed-income and currency markets to diversify your portfolio.
It’s a crazy environment out there. But if you stick to that game plan, I think you’ll come out ahead in this uncertain time.
Any thoughts on that set of recommendations? Do they align with what you’re doing in your portfolio? Or do you have other strategies you’re using? Any particular stocks, ETFs, or funds that you like here in an era of heightened volatility? Let me know.
If the last 36 hours have taught us anything, as I noted, it’s that volatility is here to stay. The European Central Bank’s actions helped launch a big rally, which was followed by a big selloff, which was then followed by a big rally — leaving investors with their heads spinning. So what do you think of the market action?
Reader Larry said: “It certainly appears that investors have finally lost confidence in the central banks. I am surprised that the market rallied after the selloff today. It looks as if we will see more selling in the next few weeks.”
Reader Denis said: “It seems that no one knows what is going on. My advice is stay liquid, reduce debt (if you have any), and do not take on any more debt if you can avoid it.”
Reader Paula added: “It’s unfortunate the policy makers still have not learned that they can’t control the markets. They keep throwing good money after bad, thinking they can shore up a ship that is sinking quickly.”
To that line of thinking, Reader Henry A. said: “The Keynesian paradigm is a total and obvious failure. It doesn’t work and never has. But we are bound to suffer from it until some other theory comes along and displaces it. The free market (i.e. capitalism) is on life support because Keynes and Harvard economists apparently have a vested interest in preserving and defending their failed scholarship.”
On the other hand, Reader Samm identified at least some parties who stand to “win” in light of the ECB’s latest action: “The ECB will now loan money for up to four years interest free. Corporations will borrow gobs of money and buy back their own shares, which will increase the value. Then officers of the companies will end up making millions on their options. What a great deal all around for the rich guys.”
Thanks for weighing in. It’s obvious to me and many others that the game of propping up asset prices to create a “trickle down”-style impact in the economy isn’t working. It helps promote artificial asset price levels, without the underlying cash flows or economic fundamentals to support them. That’s recipe for burst bubbles down the road.
Moreover, lending essentially free or even better-than-free money to banks in order to spur lending hasn’t worked. Many banks have all the money they need … but they aren’t lending anyway. That’s because end-user demand isn’t there and because the economic backdrop and credit-cycle phase aren’t conducive to a new burst of growth.
Long story short, anything can happen in the very short term. It obviously has in the last day and a half! But this latest ECB bazooka doesn’t seem likely to work any better than the last five or six Mario Draghi has conjured up.
Agree? Disagree? Any other thoughts on the wild market action? Let me hear them in the comment section below.
The remaining Republican candidates for president gathered in South Florida for a key debate last night. Donald Trump, Ted Cruz, Marco Rubio, and John Kasich were much more civil and less confrontational this time.
Florida and Ohio have primaries scheduled for Tuesday, March 15. Rubio and Kasich could be forced to exit the race if they don’t manage to win those primaries, given Florida and Ohio are their respective home states.
The embattled Internet search firm Yahoo (YHOO) isn’t giving up easily in its ongoing fight with activist investors. The company named two more board members, hoping to fend off a push from Starboard Value LP to nominate its own slate of directors and force a company sale.
Emerging markets have been on one heck of a roller coaster in the past year. Right now, they’re enjoying a rally – one led by countries like Russia and Brazil. Russia’s stock market and ruble currency is bouncing along with oil prices, while Brazil’s stock market and real currency are rallying amid hopes the country will finally put its massive corruption scandal behind it.
Will it last? Or will it fail like all the previous oversold bounces? Hit up the comment section to add your thoughts. I’d also like to hear your thoughts on the latest Republican debate, and the increasing willingness of companies like Yahoo to fight back against activist hedge funds.
Until next time,
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