2024: A Year of Storms and Volatility?

 

Ok, Stock Talk with Chris was down but not out for the week of May 24^th.  Why? Well Oak Harvest’s little town of Houston, here in Texas, suffered a brief, less than an hour long, but terribly disruptive Spring Thunderstorm that rolled straight down 290, through Memorial, the Heights, the Montrose, and the downtown financial area in Houston. We had 70 to 100 MPH straight line winds and almost 1 million Houstonians were without power for a day, 750k without power for 2-4 days, and almost 75k still a week after the storm rolled through town on Thursday May 16^th right during rush hour.  Our A+ operations team, led by Chris Ayers, piloted Oak Harvest through the logistics of the power outage and got our team back and running at full strength as quickly as possible.  TY Chris and the rest of your team.

So that storm and the outbreak of storms throughout the Midwest causing deadly tornados, and the rest of our country this year got me thinking about the topic.  It got me thinking is 2024 going to go down in history as the year of storms.  And I’m not talking just the weather. Whether the storms are weather related, sun or solar flare related, politically related here or overseas, war related in Ukraine and the Middle East, or financial market related?  Is 2024 destined to be the year of storms?

Clearly the first 5 months of the year have started off on rocky footing in the areas of weather, politics, and military conflicts.  Maybe its just the energy in the universe of peak solar cycle #25 that gave us those beautiful auroras as far south as Texas after the May sun eruptions, but something seems a bit diff in 2024.  I don’t know what it is.  However, with all the turmoil in those areas, the one area that most media commentators continue to predict rampant volatility for 2024, but has really not presented itself year to date in an abnormal way is?  Yeap, the financial markets.

Year to date, volatility in single stocks has been high particularly around earnings releases.  Look no farther than the reaction to the upside when Walmart reported about 2 weeks ago and then to the downside in their competitor Target stock when they reported earnings only about a week later. Here’s the stock of Walmart for the two weeks into and through their earnings report:  This is a 60-minute price chart and Walmart stock hit a new all-time high after their report.

And here’s the same 60-minute price chart on Target when they reported and sighted a weaker consumer.  Target stock is almost 40% below its all-time high it high in the summer of 2021 near $265 per share post the Covid reopening spending boom. Very dramatic moves at the single stock level. In very different directions.

The strong are getting stronger and the weak or laggards in the stock market are continuing to lag at the single stock level with huge volatility dispersion. Meanwhile  the SP500 Index sits near its all-time highs near 5325 and is up about 10% YTD with only 1 -2.5% down move to start the year and another just less than -6% down move a few weeks ago as pullbacks. Very little volatility YTD.

When we zoom out and look at things at the index level, financial markets volatility has been declining in most every assets category in 2024 and in  many assets it is at or near their historically lowest levels ex- the great vol collapse of 2017.

Let’s start with bond market volatility we’ve discussed many times in the past.  The measurement most use to watch this is the MOVE Index which measures Treasury bond and interest rate volatility.  Remember investors, this is where collateral for leverage investors starts.  Here’s a daily chart of the Move index.

It peaked in March of 2023 with the collapse of Silicon Valley Bank and has been more or less down and to the right for 15 months.  Remember investors, when overall Treasury volatility is declining, this allows hedge funds, and CTA’s, and trend following investors to take on additional leverage and margin up their returns more.  This is a good thing, until it goes to far and it isn’t.  When the MOVE Index is rising, leveraged investors have to de-risk and sell securities out of their portfolio’s even if they don’t want to.  It’s the way their risk models work and the way their Prime Brokers make them behave.  Here’s the weekly chart of the MOVE Index going back 5 years.

Down and too the right.Now below levels last seen near the ST top in stocks at the end of 2021.  This is still a bullish trend for stocks.

Everyone likes to talk about stock volatility and talk about the VIX Index even though it by itself is 1- not traded, and 2- not predictive. Well here is a daily chart on the VIX index.

And here’ is a long-term monthly chart of the same index.

As one can see, ex the low vol year of 2017, when the Trump tax cuts were being anticipated, spot vol as measured by the VIX index rarely if every goes below 12 for more than a few days.  However, that does not mean 1- it can’t stay near 12-15 for months or quarters, or even years as was the case from 2012-2015 and 2- you should sell your stocks and hide in cash.  However, It has meant that your marginal % return from that point on is likely to be lower than when vol is > 20, 25, or 30.

Here’s the volatility chart of the NASDAQ 100; it’s called the VXN Index, Down and too the right.

Here’s a chart of the Russell 2000 small cap index, also known as the RVX Index.  Even Even It has shown the same consistent downtrend in the last 12-18 months.  Real interest rates have been rising, which hurt highly leveraged and unprofitable companies the most which the Russell 2000 is littered with. However, this index could likely become leadership, as soon as the Fed or the market indicates that short term rates are heading lower, not out of desperation by the Fed, but by a relaxing of financial conditions on smaller companies.

Before we go, I want to leave you with some more data that I have found EXTREMELY useful at devining the possible future outcomes of the overall markets.  Here once again is a table of forward volatility futures.  This is not the VIX index.  These are futures on forward volatility, and these can be traded in the market.

I watch this like a hawk, and it was instrumental in our team forecasting significant rallies post Covid in March of 2020, as well as the rally that started late in October 2023 last year when after declining about -10%, stocks started pivoting higher while many others were talking crashes and recessions.  Right now, as it has for the past 8-10 months, forward volatility markets are saying that most of 2024 should remain calm and that the only significant vol spike might come in advance of the Presidential election into mid to late October. You can see that by the rise in the price of vol futures into the October contract expiration date where it now sits near 18 while spot vol is about 12.

 

Should this be shocking news to investors who study history?  Not as so far, the markets have followed a very standard Presidential election cycle path since their lows in October 2022 through today.  Those same cycles call for a summer peak between July 4^th and August expiration and about a 2 month move down into pre-election which historically has set up a great buying opportunity in most election years. Will that happen again in 20224?  I don’t know but we are not betting against it, as so far, the “old normal” continues to play on in 2024.

Investors, that’s it for this week, for those families still hurting from the storms of 2024, be them weather or political related, our thoughts and prayers are with you and your loved ones. For investors or retirees who have been focused on the storms on TV for 2024 and feel anxious or paralyzed, so far, those storms have not presented themselves in the overall markets and at the index level.

However, even so, if you are uncomfortable with wider range of possible equity outcomes, the Oak Harvest team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges and shock absorbers for a stock portfolio. Information on this new strategy of ours can be found at www.OakHarvestFunds.com.

Viewers, for those of you who made it this far, I want to give a shout out to the entire OHFG team as last week, USA TODAY, ranked us as one of the Best Financial Advisory Firms 2024. The award is given to top registered investment advisory (RIA) firms in the United States based on two key criteria:

• Recommendations from individuals from among 25,000 financial advisors, clients, and industry experts
• Growth in Assets under Management (AUM) over 12 months and 5-years, respectively

I personally am looking forward to helping us move up this list over the coming years by taking care of our current and future client base. From the whole team here, thank you and have a great weekend.

Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 or fill out this form for a free consultation: https://click2retire.com/Connect