Hello. This is Clark Kendall with Kendall Capital Management. Today is Friday, October 26. We’ve had volatility in the market over the last two or three weeks. We’ve had the Dow Jones moving three, four and 500 points a day. Percentage wise it’s been as much as two to three percent, which seems like a lot but actually the academic research.
The stock market volatility has actually decreased over the last 10-15 years. A lot of that has to do with institutional trading. Program trades created liquidity in the markets. It’s dampered the volatility. Compared to the Dow Jones back in the 1960s and ’70s, percentage wise it was very common for the Dow back then to move five-six percent per day.
What’s causing the volatility though? The relative volatility that we’ve had compared to the beginning of the year? Clearly in my mind it’s because interest rates have moved up. We’ve had the 10 year treasury move up from 2.2 to 3.2 percent today’s market. What does that do for the investment community?
Whether you’re investing in common stocks or bonds or alternative types of investments the discounted cash flow and that you use to analyze these securities has changed dramatically when you raise the interest rates from 2 to 3.2 percent. That’s only one percent but as a percentage moving from 2.2 to 3.2 percent almost 50%. Thus we have volatility in the market because everyone’s now rediscounting the cashflows.
On the opposite side of the coin, we’ve had a strong economy. GDP was announced today that it grew 3-1/2 percent. Corporate revenues and earnings are growing at a strong pace. Unemployment is at a historic low. That’s what makes the volatility in the market.
How does our middle-class millionaire deal with this market? When you look at the clients that need short-term cash flow, whether to pay for college, pay for nursing home bills, for retirement needs, you use higher interest rates available on the marketplace as an opportunity to lock in some attractive fixed income returns.
For other long-term investors when the market turns down like this you use this as a buying opportunity. As I always like to say, Kmart’s having a special, a blue light special, in aisle four and you can pick up some great securities at very reasonable valuations when you have a long-term perspective.
Here again, it’s been Clark Kendall with Kendall Capital, not investment management but investment nugget to help you on your journey.