Beyond Bulls & Bears

Persistent Market Volatility

Chris Molumphy
Chris Molumphy

If you’re feeling a little motion sickness from the recent market volatility, you’re probably not alone. Investors have been on a wild roller coaster ride in recent days, as markets have careened through  extreme highs and lows. But Chris Molumphy, CIO of the Franklin Templeton Fixed Income Group®, notes that this rapid cycling may not perfectly reflect the underlying market fundamentals:

“We certainly have witnessed significant volatility, and in many cases, changes in levels and valuations in the financial markets over the past several weeks. However, it’s important to recognize that relative to just three weeks ago, the world in economic fundamentals has really not changed that dramatically. It’s really been the financial markets – and in particular sentiment- that has changed.”

Sure, signs pointing to a slowing U.S. recovery –such as the credit downgrade, and worse than expected G.D.P. numbers are partly to blame for some of the weakness. But investors fretting about a double-dip recession or a repeat of 2007-2008 might do well to understand the differences in today’s markets, says Peter Langerman, CEO of Mutual Series and Co-Portfolio Manager of the Mutual Global Discovery Fund:

Peter Langerman
Peter Langerman

“We are coming into this…environment generally in better shape at least from a corporate perspective than we were back in 2008. Remember, we were at the peak of the housing bubble back then, corporate balance sheets generally were not nearly as good shape then as they are today where companies have taken the last few years in large part to shrink their balance sheets, deleverage a bit, pay-off some debt, increase cash holdings, and having been burned by what happened the 2008 time period, I think companies are much better prepared for a slower economy. ”

But if the wild ride has left some investors’ hearts pounding, it shouldn’t be entirely in fear. Although the market gyrations have caused some steep equity losses, this may actually present buying opportunities. Langerman underscores that even strong companies have been sold-off in the recent panic:

“There really has been very little differentiation among either good companies, bad companies… some of the sectors have been more heavily affected but overall the freight train has basically run over everybody in the past few weeks.”

The market volatility hasn’t escaped the Fed’s eye, either. It underscored its continued commitment to growth and stability last week by pledging to keep interest rates unmoved until at least 2013. As Molumphy notes, this gives hope to investors who fear the Fed may be out of ammunition:

“First of all, they noted that they were extremely likely to keep the Fed funds rate exceptionally low, meaning close to zero through mid-2013 — so for nearly 2 years. Secondly, they referenced a discussion on ‘The Range of Policy Tools Available’ and further, they were prepared to employ as appropriate. Now, this point of stating the tools is that they do have some additional options. QE III is a possibility if absolutely needed on a go forward basis.”

The specific form and shape of any additional QE is difficult to guess, as economists –including those at the Fed—debate which tools would have the greatest impact. But by assuring investors of continued low rates and of a ready arsenal, the Fed may help mitigate some investor unease regarding the economy. And less unease may also mean lower volatility. Most of us have had our share of hair-raising thrills for a while.

Until next time, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton,

“ ‘This time is different’ are among the most costly four words in market history.”



IMPORTANT LEGAL INFORMATION

Stocks historically have outperformed other asset classes over the long term, but tend to fluctuate in value more dramatically over the short term. These and other risks are discussed in each fund’s prospectus.

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