September 28, 2022

La Ronge Northerner

Complete Canadian News World

A Rising Tide Lifts All Boats

This year has seen its fair share of wild economic swings. After a disastrous start, markets eventually started to display an inkling of bullish momentum in Q2, 2022. The Dow Jones Industrial Average (DJIA) kicked off the year at 36,799.65 points. Unfortunately, that momentum rapidly lost traction as the Dow sank to 29,653.29 points in June. Since then, traders and investors have steadily plowed into the markets, buying the dip, and seizing value propositions.

As Warren Buffett famously said, ‘Be fearful when others are greedy, and greedy when others are fearful.’ Of course, he was referring to dabbling in the stock markets. We can tell from the last two months that the general trend of the DJIA is bullish, with the current level substantially higher than the 50-day moving average (MA) and above the 200-day moving average. At current levels, the Dow has all but recaptured lost ground in 2022, and looks set for further growth and expansion.

Bollinger Bands are a powerful economic indicator used to gauge potential price and momentum. Currently, the price level is tracking the top Bollinger band at 34,082, indicating overbought territory and a potential retracement towards the center band at 32,737.54. With Bollinger Bands, traders tend to watch for current levels exceeding the upper and lower extremities for potential reversals*. If a pullback is warranted, this could indicate a sell-off in the financial markets and a tightening of investment activity.

*Caution is advised, particularly with a strong uptrend or downtrend, since breaks above or below band lines may not be an accurate barometer of future market movements.

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Volatility Exists in Investing, Academia, Sports, & Entertainment

Volatility (Swings About the Mean) is not restricted to the financial markets alone. As a matter of fact, volatility is a common phenomenon in any competitive setting. This includes academic performance, sporting prowess, even online gaming activity. Believe it or not, the gaming community engages in probability analysis when selecting real-money games to play.

While many players are unaware of concepts such as RTP (return to player), the statistics mean something. For example, when you play Kingdoms Rise slot game at a casino, you are potentially facing a 92% – 96.84% RTP. Unlike stock-market returns, this simply indicates what percentage of your upfront capital is likely to be returned to you in the long term. While the percentages can be reassuring, they are not guarantees of performance.

In recent months, traders and investors have been seeking out alternative investments for retirement. One such option that has made it onto the radar is the I-Series government bond at 9.62% return. This inflation-matching investment is backed by the Federal Government, and presents as one of the best-performing inflation beating options available.

How is the NASDAQ Composite Index Performing?

Much like the Dow Jones Industrial Average, the NASDAQ composite index is also on a path to recovery. The NASDAQ was hard-hit in 2022, following a massive economic contraction, unprecedented inflation growth, interest rate hikes, and supply chain bottlenecks. At the start of the year, the NASDAQ was trading at 15,832.80.

That it plunged spectacularly to well under 11,000 is notable. Fortunately for traders and investors, the NASDAQ composite index has rallied over the past two months, and is now hovering around the 13,100 mark. This is due in large part to inflation expectations cooling between June and July, mitigating the need for aggressive monetary policy measures (rising rates) in coming months.

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Naturally, markets rise and fall in cycles all the time. Historically, the average stock market return is 10% per annum over the past five decades. In fact, between 2012 – 2021, the stock market averaged a return of 14.8% annually (S&P 500 index), despite wild fluctuations from year to year.

The annual returns vary significantly from the average annualizedd returns, making it incredibly difficult to hypothesize what any year’s ROI is going to be. When adjusted for inflation, the annualized real return between 2012 and 2021 is 12.4%. No doubt that the figures for 2022 will be severely impaired by the +/-8% inflation currently in force. Naturally, the yields generated from long-term investing far outweigh those of short-term trading activity.

For the remainder of the year, it’s anybody’s call. Given the extreme volatility – the VIX is the perfect indicator – it’s impossible to predict trends, patterns, or whipsaw activity. We can say with 100% certainty that markets will surprise us either way.