Whilst accredited as being an old Chinese proverb, this phrase was first used by an influential British statesman, Sir Austin Chamberlain in 1936 referring to the “(G)rave injury to collective security by Germany’s violation of the Treaty of Locarno.”
His quote “ It is not so long ago that a member of the Diplomatic Body in London, who had spent some years of his service in China, told me that there was a Chinese curse which took the form of saying, ‘May you live in interesting times.’ There is no doubt that the curse has fallen on us.”
“We move from one crisis to another. We suffer one disturbance and shock after another.”
Whilst in no way wishing to compare the political state of Europe in 1936 to the current situation, that quote seems as relevant to the financial markets today as it was then, primarily driven by a US President with a tendency to shoot from the hip, causing material movements in both the broader markets and individual stocks on which his attention is temporarily drawn. After the relative calm of the last few years, this feels like a very strange world.
One of the dangers of any market is that it is made up of a mass of individuals and humans, as a race, are becoming increasingly short-term in their outlook. It is therefore valuable to step out of that short-term bubble and look a little further back in history. When one does, it soon becomes apparent that it is the Quantitative Easing induced calm which we have enjoyed over the last decade and the last five years in particular, that is the outlier in a historical context and not the current volatility. Whilst in no way wishing to diminish the disruptive effect of the new tweet-driven diplomacy emanating from the White House, nor the geopolitical impact of a resurgent Russia, the current volatility in the market is not that abnormal. The VIX Index, the best-known measure of the volatility of the S&P 500, currently stands at 21 having spent most of the last five years closer to 10. This sharp increase in risk and volatility appears scary but when looking back over the near 30 years of its history; this is much more the norm than the exception.
So if history tells us that the current volatility is not that unusual, then what other lessons does it teach us? The first conclusion which could be drawn is that volatility, like many other aspects of financial markets, can be mean reverting and that it may be reasonable to expect a period of slightly above average volatility to follow an extended period of lower volatility, as it did in both the late 90s and following the 2003-2007 calm. As such, a well-diversified portfolio with a defensive bias adjusted for your overall risk tolerance appears advisable, and within each asset class, investments with superior risk-adjusted returns are appropriate. There are times when it is right to ‘put the foot to the metal’ and power on, and times where a more cautious approach is more prudent and, given the length of the bull market in equities, we appear to be much closer to the latter than the former. We should never forget John Maynard Keynes adage that “(M)arkets can remain irrational longer than you and I can remain solvent”, but the lesson of all great investors is that the secret of building long-term wealth is the avoidance of material losses.
Download: Weekly Comment -April 19 2018 – RH
