Rising Rates And Volatility Might Create Future Opportunities

Catching inflection points is the holy grail of trading. It’s what makes investing lore. From shorting the 2005 housing boom or skyrocketing technology stocks in 2000, to classic value investing, taking contrarian positions can create large profits and legendary reputations. While seductive, it’s a difficult way to trade over the long term. I’ve tried to deemphasize catching market turns in my evolving investing framework. However, I still wonder if today’s volatility is creating future opportunities, especially since I believe there are two identifiable factors at play.

Many investment markets are off to a rough start this year. U.S. 10-year treasury yields (the benchmark) increased by ~27% year-to-date while the S&P 500 and NASDAQ stock market indices have declined by ~9% and ~13%, respectively. Familiar volatility measures like the VIX and MOVE indices are skyrocketing. While many will blame the Federal Reserve (Fed) or inflation, I see other, more concrete culprits producing these conditions: leverage and volatility.

Many investment markets have experienced declines this year. Source: Koyfin

It’s not the Fed, per se

The Fed catches lots of flak. It’s commonly blamed for many of society’s ills from stoking inflation, to inflating stock market valuations, to perpetuating income inequality. To be sure, I’m opposed to central planning of any sort, including central banking. However, I find the Fed’s influence to be mostly exaggerated.