Today, I am going to speak from experience about ways I have seen investors and traders be their own...
March means volatility this year: Are you ready?
03/01/2013 8:30 am EST
If only investors will be that lucky.
I think the last few days of February are a preview for what we can expect in March. My calendar of potentially market-moving events reaches a climax on March 27 with a potential shut down of the Federal government.
I don’t know that the net move in the markets will be very large for March. But I’d be very, very surprised if we don’t see breathtaking volatility—confidence sapping and can’t sleep at night volatility--for March.
How much volatility? Consider the end of February a preview.
Monday, February 25: Dow Jones Industrial Average down 214 points and the Standard & Poor’s 500 down 1.8% in its worst drubbing since November 7.
Tuesday, February 26: Dow Industrial Average climbs 116 points.
Wednesday, February 27: Dow up 174 points.
Total swing 14001 to 13874 to 14075 for a journey of 504 points in three days. Net move 74 points.
Why do I see so much volatility ahead for March? For the same reason that February finished with such a flourish.
The news calendar for March is full of the kind of trend making and trend breaking uncertainty that is likely to drive stocks up one day and down the next.
The prototype event from the end f February is the Italian election, which encouraged directional bets on the euro and then confounded those bets while whiplashing the yen, Tokyo and other markets, and commodity prices. Gold up $20 an ounce on February 26 and down $20 an ounce on February 27? That’s directionless volatility at its best—or worst.
My volatility event calendar actually began yesterday with the February 28 release of the second estimate for fourth quarter U.S. GDP growth. The last estimate showed growth dipping slightly with a 0.1% decline. The consensus going into the news was that changes in estimated data for things such as imports and inventories would push the figure slightly positive at 0.01%. The number is clearly important for the debate over how badly the battles over the fiscal cliff and the sequester had hurt U.S. growth. In the event the estimate came in at 0.1% and investors took this as evidence of that the U.S. economy might be in better than expected shape. That thought, of course, didn’t last until the of the day because worries about sequester kicked in near the close.
Today, March 1, the calendar includes the start of that sequester. These automatic cuts—about $85 billion for 2013—would gradually take effect beginning on March 1. Estimates by the Congressional Budget office are that the cuts will cost the economy 750,000 jobs. I expect that the beginning of the sequester will make the financial markets more nervous, but that actual volatility will wait for numbers such as the weekly initial claims for unemployment, the monthly jobs numbers, or the monthly and quarterly retail sales figures from companies such as Wal-Mart (WMT) and Target (TGT) to show the effects of the cuts on the economy.
Next up, March 7. This is the date of the first meeting of the European Central Bank after Italy’s elections. The markets will expect Mario Draghi to say something calming about the central bank’s will to defend the euro (and Italian and Spanish debt markets.) Some investors will also be looking to see a cut in the bank’s 0.75% benchmark interest rate. If the Italian post-election search for a government has turned into a circus by then, I’d expect European stock markets and the euro to be disappointed if the bank doesn’t cut rates. Don’t underestimate Draghi’s ability to talk up financial markets—as Federal Reserve chairman Ben Bernanke did this week. His March 7 press conference will be a major test of the continuing power of his words.
March 15, Italy’s newly elected parliament finally meets to begin the process of picking a new prime minister.
March 20, Italian president Giorgio Napolitano invites Pier Luigi Bersani, as the leader of the coalition that garnered the most votes in the February 24-25 election, to try to form a new government. If Bersani can’t, Napolitano will gradually work his way down the list until he either finds a solution or declares that he can’t find one. There’s obviously a good chance that the search for a new prime minister will unsettle financial markets—and, of course, there’s the outside chance that Napolitano will actually find a way to form a government, which would cause a huge rally in the euro, EuroZone stocks, and Italian debt.
March 20, the Federal Reserve’s Open Market Committee ends its meeting with a press conference. No one expects that the Fed will change interest rates, but everyone will be parsing the Fed’s words for clues on the timetable for ending the central bank’s most recent round of quantitative easing. If ever words move markets, this is an occasion.
March 27, the continuing resolution that funds the government expires. Absent a new continuing resolution or passage of a budget (virtually no chance of that,) the government will run out of money and all non-essential services (and some essential services) will shut down. This is actually a much bigger deal than the sequester although not, at least from the perspective of global financial markets, as big a deal as the debt ceiling battle. A failure to raise the debt ceiling could have led to a default by the U.S. government on its debt. The next debt ceiling crisis doesn’t come until May 18.
If I’m right and we’re looking at a March with big volatility, what do you do?
First, immediately, right now, not tomorrow. You go through your portfolio and decide what stocks and other assets you’re willing/able to hold through the volatility. Try to separate those assets that might take a beating in any market downturn—and would then also recover with a market upturn—from those that will show fundamental damage from likely events in March. This doesn’t, for example, look like a time to stubbornly hold onto economically sensitive stocks—if the economy slows as feared, you might want to be light on retailers. On the other hand, I don't see a need to sell the shares of companies such as IBM (IBM) or McDonald’s (MCD) that have shown an ability to grow revenue and earnings during periods of modest economic softness.
Second, sell those stocks that you’ve decided not to hold through a volatile March—but see if you can make your sales on a rally day. Just as we’ve seen a big drop and a big rally this week, I think you’ll see selling opportunities on up days during March.
Third, try not to let those rally days change you decisions on what and when to sell. A rally in March isn’t likely to last long and it isn’t a sign that volatility is over and markets are headed back to normal (however you define that.)
Fourth, raise a little cash using this selective selling on up days so you have the money to take advantage of bargains—if volatility sends any your way.
Fifth, put together a list of stocks you’d like to buy if March volatility brings them down to attractive prices. I gave you a list in my February 25 post http://jubakpicks.com/2013/02/25/10-stocks-for-after-a-correction-if-we-get-one/ that you can use to jump-start your own ideas.
Sixth, and most important of all, try to keep some perspective even during the most volatile days. March volatility doesn't mean that strong medium-term trends that you should be watching for a chance to make some money are over. For example, every scare that sends the euro falling will produce a very temporary yen rally that will send stocks down in Tokyo. But I think you can count on the Japanese government to keep downward pressure on the yen that will eventually weaken that currency. Short of a full-fledged return of the euro crisis—and I’m still not looking for that until the July to September period—I think you can count on the trend for the yen being downward—no matter the day-to-day volatility.
If you want to make this personal—and some days I admit to feeling that the market is out to get me—you can think of short-term volatility as a force that wants to make you do stupid things with your money. Your job is to resist and to keep thinking.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of IBM, McDonald’s, Target or Wal-Mart as of the end of September. For a full list of the stocks in the fund as of the end, of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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