September 2016 – High Volatility As Expected

Investors got a good reminder last Friday that equities don’t always grind up in listless trading with low volatility. After over 40 straight sessions where the S&P 500 neither rose or fell by as much as one percent, stocks fell hard on increasing worries that the Federal Reserve might actually hike rates by a quarter point to a whopping .5% when the group convenes next week. If not in September, then more than likely in December rates will rise a quarter percent. This is the scenario that seems most likely it doesn’t seeem Chairwoman Yellen would want to interject in the markets less than six weeks before a contentious and very close presidential election. That just isn’t how things are done in Washington.

The S&P 500 and the NASDAQ dropped more than two and a half percent on Friday. Small caps and biotech were down a bit more than three percent on the day. Shockingly the “low beta” Utility sector was down nearly four percent in one day as the ten-year treasury yield hit levels not seen since early summer, albeit still under an anemic 1.7%.

What this sudden downdraft should tell investors is that portions of the market are “overbought”, some of the high yield sectors like Consumer Staples and Utilities that income seekers have bid up to extreme valuations in their desperate search for any kind of yield in this low interest rate environment are frankly priced for perfection.

However, there are still pockets of value such as some of the large biotech concerns that collectively sell at their lowest valuations to the overall market in over a decade. Some home builders also look cheap given that housing activity should continue to strengthen over the next few years given the large amount of pent up demand, the way below trend volume of housing starts over the past 10 years, as well as historically low mortgage rates.