In my September 1 post, I wrote about the increasing level of volatility in the markets, which continues to be one of my major concerns. The S&P 500 plunged 7.2% in September then surged 10.8% in October. Although few investors complain about upside volatility, I see it almost as problematic as downside volatility. Upside volatility provides further evidence of the high level of uncertainty currently plaguing the markets, and it does not provide comfort to the average retail investor who is sick and tired of seeing his/her portfolio balance jumping around like the electrocardiogram of a heart attack victim. And without a critical mass of retail investors, who are more likely than institutions to invest for the long term, the market is not likely to calm down.
Clearly there were some good economic reasons for October's gains. Most importantly, the advance GDP estimate for the third quarter was better than expected. Although the 2.5% growth figure might eventually be reduced when more data becomes available, it was a pleasant surprise to many economists and investors. However, most of October's gains can be credited to growing optimism that Europe would actually be able to appropriately address its debt problems. I continue to believe this optimism is premature.
Europe's problems are serious and they are beginning to have a negative impact on U.S. companies in unexpected ways. C.R. Bard (BCR), for example, a $7 billion (market cap) medical device maker, took a $7 million write-down in the third quarter for the impairment of Greek bonds. I have no doubt that there will be more companies taking similar write-downs in coming quarters.
Despite the recent jubilation about Europe, we are already seeing trouble ahead. The latest news that the Greek government wants to hold a referendum on the bailout package it has already agreed to, has really shaken the markets. Greek politicians hope the referendum will pass and put an end to street demonstrations and riots. However, austerity measures are extremely unpopular and not likely to be approved by popular vote. This all but assures that the markets will remain incredibly volatile.
Volatility may be a trader's best friend. Those nimble enough to jump in and out of the markets can make a quick buck. (Quick bucks, by the way, are good for the government, because they are taxed at higher rates.) Volatility does not mean that long-term buy-and-hold investing is dead. But it does make entry points more important than ever. If you are a long-term investor, I suggest taking the big sell-offs as good opportunities to add to positions in high-quality, profitable, dividend-paying stocks.