Stay Long Neck Braces And Equities

Don’t expect market volatility to subside anytime soon, according to a new report from Bank of America, U.S. Trust. Invest in a neck brace and in high quality, well-managed, world-class companies attractively valued after December’s market meltdown, says Joe Quinlan, Head of CIO Market Strategy.

The wholesale re-pricing of assets has afforded investors a propitious opportunity to re-energize/rebalance portfolios. Periods of steep market declines typically reset valuations and wash out investor sentiment, providing the base/bounce for upside moves in equities.

Quinlan says, think technological innovation (robotics, artificial intelligence), the global healthcare revolution and the incessant demand of emerging market consumers for travel and leisure, cosmetics, e-sports, and luxury brands goods. The world never as affluent as today, and the residual of wealth is waste—making waste management one of his favorite long-term plays.

There is nothing investors want more than to leave behind the market volatility of 2018 and walk on firmer ground in 2019. Owing to the toxic convergence of rising U.S. interest rates, simmering U.S.-Sino trade tensions and peak global earning expectations, among many other variables, volatility returned with a vengeance in 2018, notably down the home stretch.

Missing in action in 2017, the Chicago Board Options Exchange (CBOE) volatility index (VIX ) averaged 25.0 in December 2018, up from an average of 11.1 over the course of 2017. In December alone, the S&P 500 booked five days of losses exceeding -2%, after having experienced none throughout the entire year of 2017.

After the Fed raised rates for the fourth time of the year on December 19, and after reaffirming its commitment to continue raising rates and reducing its balance sheet, stocks sold off hard, with December 24 posting the largest-ever Christmas Eve decline for both the Dow and S&P 500. However, the major indices the day after Christmas posted one of the strongest single-day returns in over a decade. Then on December 27, the Dow rebounded from a more-than-600 point intraday loss to close up 260 points, the largest daily point recovery in the history of the index. The market swings capped one of the worst years for stocks since 2008 and left many whipsawed investors wishing they had unwrapped a neck brace for Christmas.

Barn Cats

Market volatility will remain the norm until Fed Chairman Jerome Powell and the Fed’s growth-cum-inflation expectations align with the markets. Miscommunication was a key part of the late-2018 market implosion, beginning with Powell’s October 3 comment that interest rates were “a long way from neutral.” The comment didn’t square with market sentiment worried about weaker U.S. growth and, more importantly, moderating inflationary expectations heading into 2019.

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