QUIET MARKETS

Summer time is here, and the current heat and humidity making going outside almost a risky adventure.

One area that seems to have lost its risky nature are the financial markets. The political volatility of Washington, the inability of the Republicans to get major campaign promises passed and the cable news networks’ obsession with Russiagate is not disturbing the stock or bond markets so far. In fact, financial market volatility is at a multi decade low. This low level of volatility in the stock market is unusual.

Exactly why there is such little volatility I don’t know, but there is a flip side to the low volatility coin that we feel we should consider. A good analogy of the potential consequences of a long period of very low volatility involves a boat, passengers and a body of water. When a boat leaves the dock, the passengers are rightfully concerned about being safe. So they wear life jackets and prefer to sit in the middle of the boat, so if a big wave comes at them they are in little jeopardy of being bounced out. However, after a relatively long period of no waves, they may take their lifejackets off and may even enjoy sitting on the edge of the boat. Again, there are no rough waters to make them concerned about falling out, so they are more relaxed. However, they have unwittingly put themselves in a much riskier position. Now, should a big wave hit them, they are in a much more precarious position and are subject to some potentially serious consequences.

Human nature is no different whether we are on a big lake in a motorboat, or if we are investing our retirement plan assets etc. We are very aware of risk when we are experiencing it, but our memories can be rather short, and we often project current conditions into the future.

There is a good chance that what we are experiencing in the financial markets is that this long period of calm has enticed investors to take more risk than they normally would- certainly more than they felt comfortable taking at the end of the financial crisis of 2007-2009. Ironically, that is when financial market valuations were such that they were actually much less risky, as many financial assets were trading at low valuations. Low valuations are the financial market’s proxy for lifejackets and sitting in the middle of the boat- the low valuations can provide a “margin of safety”, a well-known term in the investment world.

Long periods of low volatility, especially when accompanied by low interest rates, can attract investors into riskier assets than they would normally invest in. And these monies can push market valuations into a more expensive level. This is important because these investors might not stay invested when normal market volatility returns. This can make a market pullback even greater than it would have been, as these investors who do not have the temperament to withstand the normal volatility of markets, exit the markets.

When and to what degree a normal correction (pullback) in this market will occur nobody knows. But this is why we maintain a disciplined approach to your portfolios and do not let the current lack of volatility lead us into putting you into a more risky position. We endeavor to make sure that you are not exposed to any more risk than is absolutely necessary for you to reach your goals. Whether today’s waters are smooth or not.

Thank you as always and do not hesitate to call us with any questions, thoughts or concerns you may have.

Beach

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC