Notes on Volatility

Theo Bousalis - Feb 17, 2022


On the invasion of Ukraine

Most importantly, this is a humanitarian disaster and our thoughts are with the Ukrainian people.  We hope it can be solved with little bloodshed, but at this juncture it looks like a remote possibility. 

As far as the market impacts – we have seen historically, exogenous shocks like military conflicts tend not to have a lasting impact on the markets.  There is a negative initial reaction with a subsequent recovery in most of the cases.  Going back to 1940 the median downdraft was 2%, followed by a gain of 8% in the next 6 months, and over 20% in the subsequent year.  This is calculated as price returns on the Dow Jones Index (as it is long-running).

Source: BMO Nesbitt Burns

On interest rates

We are in a too accommodative interest rate environment right now.  It needs to become a bit tighter before damage is done to the economy.  It typically takes a long time to trigger a recession from the start of lifting rates to the time policy becomes too restrictive and  a recession unfolds (grey vertical bars).  Right now, things still look good but money is shifting to different sectors to adjust for changes in interest rates.

Source: Fidelity Investments


I recently had a client email me that she has COVID and is getting through it thankfully.  

On equity market volatility

According to Haver Analytics, insiders of publicly traded corporations are buying into this market pullback as they have at other negative points in history.  Basically, in other points of market stress insiders have typically indicated a temporary bottom. example 03/11/09  Market dropped -44% and insiders were buying.  The old adage is that insiders will sell for many reasons, but they only buy for 1 reason – they feel their company offers compelling value.  Could we be close to a bottom in this pullback that has put the market on its heels so far in 2022? Time will tell. 

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