Seeking an antidote to global trade jitters? Check out these buying opportunities
After being mostly absent in 2017, volatility has made a comeback. The S&P 500 Index closed down for the first three months of 2018—the first time it’s done so in 10 quarters. It also had its worst start to April since 1929. Gold performed as expected during the quarter, serving as a safe haven and delivering positive returns, while the price of oil surged more than 5% on U.S. dollar weakness and news that OPEC and Russia could be cooperating to limit output for a long period.
Before continuing, I think it’s important for investors to remember that each asset class has its own DNA of volatility. For the 10-year period as of April 4, the 60-day, or quarterly, the standard deviation for the S&P 500 was ±8%. What this means is that, even though the S&P was down 1.22% in the first quarter, the decline was well within its expected range of one standard deviation, which occurs roughly 68 percent of the time.
The same can be said for oil and gold. For the same time period, oil had a standard deviation of about ±20%, while gold bullion’s is right in line with the S&P: ±8%. That all of these assets stayed within one standard deviation for the 60-day trading period makes their performance a non-event. It’s when they exceed two standard deviations that investors might want to consider a trade, as the asset could be ready to revert back to its mean.
Look Past the Short-Term Noise
Much of the recent selloff has been related either to fears over a potential trade war with China, the world’s second-largest economy, or expectations that tech stocks—most notably Facebook and Amazon—could face additional regulatory scrutiny.
Although U.S. tariffs on Chinese imports, and China’s proposed taxes on American goods, have not been imposed yet, markets are already beginning to price in the news. Shares of Boeing, the largest U.S. exporter by value, have dropped more than 8 percent since their high on February 27, following announced U.S. tariffs on imported steel and aluminum and China’s plan to levy as much as 25% on American-made aircraft. Aircrafts, by the way, are hands-down the United States’ most valuable export, followed by gasoline.
Meanwhile, Trump’s criticism of Amazon’s shipping deal with the U.S. Postal Service, not to mention the media’s negative coverage of Facebook’s relationship with British political consulting firm Cambridge Analytica, weighed especially hard on tech stocks.
(This is nothing new, though. To educate investors on how quants comb through social media and use sentiment analysis to make their trades, I like to show this video featuring the Trump and Dump Bot, which you can watch here.)
To be clear, I believe this is all short-term noise—even after Trump suggested adding tariffs on an additional $100 billion of Chinese goods Friday morning to combat the effects of alleged intellectual property theft. A trade war could be a concern sometime down the road, but I’m confident U.S. and Chinese officials can work together to avert a full-blown tit-for-tat standoff.
But if this risk is too great at the moment, an attractive place to be could be in domestic-focused, small- and mid-cap stocks, which have limited exposure to international trade compared to their large-cap siblings. They therefore could see little impact from any imposed tariffs.