The markets this year could be described with one word, stability. We’ve seen very little in the way of volatility. Even when bad news has consumed the headlines, markets have shrugged said news off and continued their upward climb. This is very different, if not bizarre, behavior for the markets. Usually when bad news of any kind starts coming out, even if it is an unproven rumor, the markets tend to react creating what we call volatility. A popular measure of volatility is the VIX index and earlier this month it hit its lowest level since 1993. What could possibly rock this boat?
Well, we found out on Wednesday when the markets finally had enough and we saw the largest drop of the year. The Dow Jones and S&P 500 lost 1.8% each and the Nasdaq lost 2.6%. You would have to go back before President Trump was elected to see drops on this scale in one day. Then on Thursday, emerging market stocks were walloped due to a drop in the Brazilian market. The Bovespa index dropped a whopping 8.8% in just one day. After all the dust settled at the end of the week markets had clawed back at least some of their losses. But the question remains, what in the world is going on?
In the US, the scandals swirling around Trump were finally enough to offset the hopes of reduced taxes and regulation along with increased spending on infrastructure. These policies will no doubt help ignite the US economy in the short run, along with our debt, and it has been enough to stave off concerns over the ever mounting scandals coming out of Washington. Well, that was the case until now. Trump was already facing questions cornering what he revealed to Russian diplomats. Then Tuesday evening, scandal number two broke out.
A report was published that claimed Trump approached former FBI director James Comey asking him to drop the bureau’s investigation of Michael Flynn. As you may know Flynn was the former National Security Adviser and was appointed to this role by Trump. Also, as you probably know, Trump fired Comey. Who knows if any of these allegations are true but the simple fact that the allegations exist is enough to cause markets to be skittish. Whenever past allegations have come out the markets have basically ignored them but not this time. They reacted with a quick and harsh selloff.
Now Brazil is in the midst of their own set of new allegations just as the US is. Brazilian President Temer was caught on tape condoning bribes in order to silence witnesses. If you remember last year President Rousseff was impeached and found by the Senate to be guilty of breaking budgetary laws. To connect the dots, Temer is Rousseff former Vice President. These corruption allegations aren’t new. They began three years ago when an executive of state run oil company Petrobras was arrested. As these years of scandals have drug on it is has thrust the Brazilian economy into a recession. This is a story that anyone investing in the emerging markets needs to follow closely.
At the end of the day, the key to remember is simple, markets are rarely this stable for this long. Volatility will happen, it’s inevitable. You have to learn to ignore the daily moves of the markets in order to keep yourself from overeating and doing something stupid. This week was a great reminder that a perfectly calm market isn’t normal.
Also, it is my belief that anytime you invest money you have to have a game plan. Just like an entrepreneur creates a business plan before starting their new venture you need the same when investing. You have to decide what your investments will be and what you will do if markets go way up, if markets go way down and then stick to this plan. The worse thing you can do is deviate from your investment plans during market turmoil.
This weeks scandals are mostly likely not going away. It is sure to cause more volatility than we’ve seen so far this year but hopefully both governments can clean up any corrupt behavior that is enveloping their nations. It’s in all our best interest to have governments ran by ethical politicians.