Stocktake: Investor jitters look likely to persist

Volatility, it appears, is back. After two years of remarkable calm, investor jitters have returned. It’s not simply that stocks are declining; there have been many pullbacks in recent years. No, it’s actually the manner of the declines.

Last Tuesday, the S&P 500 was soaring higher before abruptly retreating – the first big negative reversal day in four years.

The Dow also ended in the red after a wild 400-point intra-day swing.

Daily moves have averaged 0.95 per cent in 2015, almost double 2014 levels.

Similarly, the Vix – or fear index – confirms a volatility breakout. The index averaged 14 in 2013-14, spikes invariably petering out around the 20 level.

However, after briefly hitting 30 in October and 25 in December, the Vix has remained above 20 for most of 2015.

Volatility can hardly disappear any time soon, given the huge moves in other asset classes. Oil has fallen 60 per cent; copper is at six-year lows; Russia's rouble and the euro have been in freefall; last Thursday's 30 per cent rise in the Swiss franc was a stunning shock.

Equities cannot remain immune from such shocks. This year may yet prove another strong one for stocks, but don’t expect the ride to be a smooth one.

Bank is ‘under assault’

Poor JP Morgan. “We have five or six regulators coming at us on every issue,” chief executive

Jamie Dimon

(pictured) told reporters last week. “You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”

It’s heart-breaking. Sure, shares may be near all-time highs, following record profits of $21.8 billion in 2014 and $17.9 billion in 2013.

They would surely be higher, however, were it not for all those rotten fines – more than $25 billion over the last two years, including $13 billion for the bank’s subprime mortgage dealings, $2.6 billion for failing to stop Bernie Madoff’s Ponzi scheme, $1 billion relating to manipulation of interest rates, $920 million to settle charges relating to the London Whale trading scandal and $410 million for allegedly ‘gaming’ energy prices.

Last week, Dimon announced another $990 million was being set aside for future legal losses.

Dimon, whose pay packet rose 74 per cent to $20 million last year, says banks are “under assault”. It could try a different approach that might help cut those bills: just stop breaking the law.

Catch-up time for Europe?

US stocks have outperformed Europe’s for years, but is a turnaround nearing?

The valuation of US stocks relative to the rest of the world is at record highs, says Merrill Lynch, topping the prior peak in 2001.

Until now, US stocks justified higher valuations by delivering on earnings, in contrast to Europe’s corporate sluggishness.

However, the rising dollar has resulted in estimates being slashed in recent months, projected growth rates falling from 11.2 per cent in October to 3.6 per cent.

Oil’s collapse means energy companies face the biggest declines, but estimates have fallen in all 10 S&P 500 sectors.

Falling oil prices will also hit European energy companies, but should boost overall European earnings by at least 7 per cent, says Morgan Stanley. Oxford Economics also expects a profit recovery, citing the weaker euro, commodity declines and sluggish wage growth.

Timing any turnaround is impossible, but the changing earnings picture means a normalisation in relative valuations may occur sooner rather than later.

Seven-year itch for stocks?

High-profile bond manager

Jeffrey Gundlach

is cautious on US equities for 2015, last week warning that the S&P 500 is attempting to do something never done before: rise seven years in succession. Société Générale agrees, recently saying another year of gains “would seem highly unlikely” for this very reason.

Would it be pedantic to note the index actually slipped in 2011, beginning the year at 1257.64 and ending it at 1257.6? Perhaps – after all, the S&P gained if one includes dividends.

However, as money manager Ben Carlson noted on Twitter, if one includes dividends – and one should, to get a true picture of events – then stocks actually gained eight years in a row between 1982 and 1989, and nine years in a row from 1991 to 1999.

Stocks may well fall in 2015, but it won’t be because of some mysterious seven-year itch.

Cola bad, burgers good

Billionaire hedge fund guru

Bill Ackman

doesn’t fancy investing in Coca-Cola or

Pepsi

, he told

Bloomberg

last week. “I don’t like sugar. I think it’s bad for children and bad for people . . . I like to invest in things where I like the product.”

Very laudable. In the same interview, Ackman praised Burger King – he owns more than $1 billion worth of shares in the company – for “taking very meaningful market share away from McDonald’s”.

Now there’s a coherent health message: cola bad, Triple Whopper good.