- Lance Roberts of RIA Advisors warns that volatility is coming for stocks.
- He made his point in his commentary on July 27.
- Roberts blamed Federal Reserve policies for leading to excessive investor speculation.
Shares have been relatively calm so far this year. Maybe too calm.
According to Lance Roberts, the chief investment strategist at RIA Advisors, which oversees more than $ 1 billion in assets, signs that stocks are heading into a period of volatility – on the downside – are starting to pile up.
Roberts argued in a July 27 remark coin that the period of stability and excessive speculation that the Federal Reserve has created through its accommodative monetary policy and promise to support financial markets is driving the market into heightened volatility.
“There are periods of unusually low volatility in the markets, which breed overconfidence and speculative appetites. However, these periods of unusually low volatility are also a problem,” Roberts wrote.
“Long periods of ‘stability’ with regularity lead to periods of ‘instability’,” he continued, illustrating his point with the chart below, showing that large spikes in volatility tend to occur. after periods of appreciation and tranquility.
For Roberts, the markets are in a worrisome situation as investor exuberance is evident in all asset classes.
Yields on junk bonds are at historically low levels, meaning demand for them is high as bullish investors put aside worries about defaults. The number of mergers and acquisitions is also on the rise, indicating that companies are confident in their spending as investors line their pockets. The amount of money borrowed by investors is also at record levels. Valuations are inflated. The list goes on.
And there is no doubt for Roberts that this exuberance in the market is being driven by Fed policy.
“With an R-Square of almost 80%, the Fed is clearly having an impact on financial markets,” he said of the regression analysis presented below measuring the relationship between stock performance. and support from the Fed.
But back to volatility. A big reason Roberts sees volatility coming is because of what’s going on in the bond market. Yields have hit significant highs for now, and when they have in the past, stocks have followed suit and sold. 10-Year Treasury Bill Yields fell below 1.3% against 1.74% at the end of March.
This should not be the case given the rise in the Consumer Price Index (CPI) and strong GDP growth, Roberts said.
“The risk to this entire market remains a credit-related event,” said Roberts. “Interest rates warn that ‘something is wrong’ in the financial system. Previously, when rates went from low to high, it preceded periods of ‘market instability’.”
Roberts’ views in context
Roberts’ concerns about the role of Fed support in financial markets echo those of many other investors and institutions.
When the central bank will announce – or even hint at – when and how quickly it will begin to curtail its asset purchases is closely watched by market participants.
Given that CPI numbers and announcements about the Fed’s cutback plans are likely to come, bond yields could skyrocket soon in a short period of time. If they do, investors could shy away from stocks for more attractive risk-free returns and cause a sell-off.
Future volatility is also a concern. Dave Keller, chief market strategist and technical analyst at StockCharts, told Insider on Tuesday that he considers a 10% correction in the S&P 500 to be “very likely” and that cyclical sectors could fall even more than that. This is due to the deterioration of measures of market extent and the disconnecting of moving averages.
Still, Keller believes that the S&P 500 will close the year around current levels, in line with the Wall Street average forecast around 4,240.
With many overstated valuation metrics, stocks are undoubtedly in a tight spot. They have seen virtually unrelenting gains since February and the S&P 500 is up 18% this year. As Roberts noted, this can be a dangerous thing. Even if the period of weakness is short-lived and does not put stocks on the
territory, investors should keep their eyes open.