Still In Thrall With Low Vol

When Jimmy Carter’s Chief Economist was asked in 1979 to avoid using the “R-word,” he cleverly substituted another—and then promptly forecast the nation was “headed for a serious banana.” We wish Alfred Kahn, who died in 2010, had coined an alternative for the “B-word” before it came to describe almost any asset with a price chart showing a move “from the lower left to the upper right.”

While we wouldn’t go so far as to tar it with the “bubble” epithet, the ongoing investor obsession with stability strikes us as considerably more dangerous than the situation in the Technology sector.

Chart 1

While many see market parallels with 1999, we instead see a mirror image. The latter half of the 1990s was obviously characterized by strong economic growth, culminating in a final bull market phase in which no price appeared too high for superior EPS growth. The current expansion, on the other hand, has delivered a massive shortfall in growth and a scarcity of income along with it. Predictability of growth (rather than the level) has therefore become a highly desired trait—and if that growth is accompanied by a steady dividend stream, so much the better.

Chart 2