In the world of major finance there’s one thing for certain — periods of uncertainty. When I worked in the upper echelons of Wall Street, on days when the rest of the world was increasingly anxious, we made the most amount of money.
That’s because we were pinpointing trades. We didn’t fight the tide — we accepted it. The actual direction of the markets didn’t matter. The movement itself did. The greater the movement, the greater the profit.
For you, the key is to always consider what constitutes more and what generates less uncertainty, or volatility. That goes for the markets in general, and for your investments in particular.
From there, it’s pivotal to determine whether that determined volatility is temporary, like a strong wind blowing over the bow of a boat, or settling in for a longer haul, like a full-fledged hurricane whipsawing your ship around for days. Those winds can last whole seasons, representing back-to-back hurricanes in the market, one after the other.
Volatility isn’t necessarily a bad thing — if you’re prepared for it.
Taking proper steps can include setting aside cash for a rainy day, getting back into the markets after a sell-off or investing in a stock or option that does better when volatility increases. Measures like these can leave you well positioned regardless of the markets moving up or down.
We’ve definitely entered a new environment. Last year, the Dow Jones industrial average rose nearly 24%, the Dow Jones Real Estate Index rose 6.20% and the price of bitcoin skyrocketed over 1,646%.
But as we find ourselves a quarter of the way into 2018, it is clear that much of that has changed. Only two months ago the Dow had its worst single-day point decline in history. And the Dow has had more down days of 1% or more than it had in the past two years combined!
With the Dow Jones industrial average down since the beginning of the year, and logging in several days of movements of hundreds of points in both directions, the question is will the seas calm? Or will we need to navigate harsher weather?
I think the latter.
Yet as I mentioned, that’s not necessarily a bad thing in terms of opportunities. As long as you realize that volatility is never caused by one factor — but rather several factors operating at the same time, together or against each other.
One major positive for Wall Street is the newly appointed president of the New York Federal Reserve, John Williams.
Hailing from his position at the helm of the San Francisco Fed, Williams is pretty relaxed about how the banking system operates.
Williams’ relaxed regulatory stance is something of greater importance to the banking community and an area that most people aren’t thinking about or examining.
Williams is also a fan of raising the inflation target of the entire Federal Reserve System from 2% to something higher.
What does that imply?
That he believes if the banks need more help in the form of cheap money, the higher the inflation target, the less the more hawkish members of the Fed will be able to say that reducing rates again will raise inflation above that target.
To put it simply: John Williams is a fan of what I call Dark Money. That means if the markets wobble, he’ll advocate cutting rates or invoking more quantitative easing. All of that is positive for Wall Street and for stock markets.
Managing editor, The Daily Reckoning