Shock Therapy: Volatility Spells Opportunity

Over the past six months, the world has seen the price of crude oil decline by over 50%.  Other commodities such as copper, gold and iron ore have also suffered declines, as demand from emerging markets has weakened.  The supply/demand imbalance has created some uncertainty as to where commodity prices will eventually settle, and the sharp price moves have contributed to some of the volatility in financial markets.  Times of uncertainty will always create some fear among investors.  In fact, the Yale School of Management monitors a “Crash Confidence Index”, which has proven to be a contrary indicator over the years.i  The index has recently shown that investors are increasingly worried that a “crash” is looming.  To provide some context, investors were most confident of a crash in the first quarter of 2009 when the market bottomed during the financial crisis.  In short, although market volatility may rear its head every so often, lower commodity prices (particularly in energy) have accelerated growth historically (and vice versa). 

According to market strategist Dave Rosenberg, “the early 1970s, late 1970s, early 1990s, the 2008 backdrop, and every U.S. recession had the thumbprints of surging crude oil prices.  Then go to the mid-1980s, the late 1990s and again in 2009, and sagging oil prices were one of the mechanisms for accelerating economic growth.” ii  In particular, Tom Lee of Fundstrat highlights that two of the best performing sectors following oil price declines are telecom and consumer discretionary.  Consumer discretionary will be helped by wage growth, employment, and additional spending power from lower gas prices (particularly companies with a domestic focus.)  Telecom has begun to generate improved returns on their invested assets, but the sector still trades at a 50% discount to the S&P 500, according to Lee.  As the market transitions “to an earnings growth driven phase,” investment opportunities will continue to be present. iii

We are entering somewhat of a sweet spot, in that both Wall Street (i.e. investors) and Main Street will both benefit.  Ray Dalio recently mentioned that we are in “the mid-part of a cycle.  This is the easy part, the good part of the cycle.” iv  Also, the US dollar has been strengthening, which has been positive for U.S. market multiples historically.  Per Rosenberg, there is a “time-worn 75% positive relationship between the direction of the U.S. dollar and that of the market multiple,” which would suggest a continued upward rerating of U.S. assets.v  Furthermore, the central banks of developed economies continue to fight deflationary pressures, most recently with the ECB’s easing measures.  As David Tepper stated, “You have people responding to deflation all over the place.  First thing that goes up when people try to fight deflation is asset prices.” vi  For this reason, I expect “developed” markets to outperform “developing” markets for the foreseeable future.  While I expect the market to hit an occasional bump, it could be a lucrative year for the experienced active investor.  The uncertainty that has seemed to permeate the equity market suggests that equities with secure, growing dividends and shareholder friendly stock repurchase programs will continue to provide investment opportunity.  It’s worth mentioning that “$2 trillion of share buybacks over the past five years from just the S&P 500 constituents” are creating somewhat of a “scarcity factor” in public equities, or what I would call good old fundamental supply and demand.vii  Although some investors may fear another crash with every tick up in market volatility, opportunities will persist.  As the classic star Mae West once said, “Those who are easily shocked should be shocked more often.”

The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC.  This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates.  This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.                                                                                                                                             

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has over 30 years of experience in the financial industry.  Ms. Rosenau was recently ranked #76 in Barron’s 2014 Top 100 Independent Advisors and ranked #15 in Barron's 2014 Top 100 Women Financial Advisors. She was also chosen for Barron's 2014 Top 1,200 Advisors list, ranking #52 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.

i Andy Kiersz. Business Insider.  More And More Investors Are Convinced A Stock-Market Crash Is Coming.  January 6, 2015.

ii David Rosenberg. Gluskinsheff. Breakfast with Dave. January 9, 2015.

iii Thomas Lee. Fundstrat. History shows weak 2015 start is “best case”. January 9, 2015.

iv Kathleen Laverty. Fundfire. Bridgewater to Launch First New Strategy in 19 Years. January 12, 2015.

v David Rosenberg. Gluskinsheff. Breakfast with Dave. January 8, 2015.

vi Melissa Lee. CNBC. Appaloosa’s David Tepper sees 8% to 10% upside in 2015. December 29, 2014.

vii Tobias Levkovich. Citi Research. January 2, 2015.

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