2015 started on a bad note with the S&P 500 down 3%. Investors seem to still be deciding if cheap oil is a net positive for the economy and whether the monetary policy changes coming forth domestically and in Europe will avert another global recession. As you might expect, the portfolio barometer shows that bonds fared well as stocks did poorly.
We are beginning to get accustomed to the stock market’s dramatic swings with volatility increasing. We have already discussed in past articles how oil price fluctuations have played spoiler for many investors. However, the big surprise is the volatility seen in interest rates. The 10-year Treasury dropped from 2.17% at the end of December to 1.68% at the end of January. This is a pretty big change for a security that is often considered a safe, low-risk investment. In dollar terms, you could think of it in this way: a $10,000 portfolio of 10-year Treasury bonds would have generated $217/year if you bought them at the end of 2014. Waiting one month to buy the new 10-year Treasury bonds at the end of January would have cost you over 22% of your annual income!
The chart below shows the realized volatility of these three assets. It is interesting to note that we haven’t had both oil and bond price volatility this high at the same time since the 2008 financial crisis. Of course, stock volatility is not anywhere close to the 2008 levels and is actually right around its historical average. Can we garner anything from all of this?
Another financial crisis does not seem to be on the horizon. We appear to have a “wait-and-see” on several fronts. I think our labor market will continue to improve and the remaining question is when will the Fed raise rates to keep our economy from growing too fast. Oil could continue to go down, especially if OPEC maintains their status quo on production. However, it is difficult to see oil prices dropping much further. Interest rates have already reversed course in the first week of February, but until we see how Europe’s quantitative easing programs work, we may expect further whipsaw activity.
Our overall outlook for 2015 is still optimistic. Although January didn’t have an ideal start for stock investors, there are still plenty of reasons to expect positive returns. You only need to go back one year to debunk the myth of January determining stock performance for the rest of the calendar year, so let’s keep pushing forward and make the most of a promising 2015.
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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