Why Are Stocks Faltering?

On Wednesday, I wrote that I was ‘double shocked’ to see that the yield on the 10-year US Treasury note had fallen to 2.175 percent, so imagine my surprise yesterday when the yield fell to 1.86 percent – triple shocked!

What was to blame for the steep initial losses and sudden (though not complete) recovery? No one really knows, actually, but here are some of the more credible theories across a few broad categories:


  • Normally, the NY Empire State Manufacturing Survey doesn’t command much attention, but yesterday’s release was pretty ugly, as factor growth in New York slowed down markedly.
  • Inflation data was weaker than expected, and while it wasn’t as surprising as the manufacturing data since it can largely be explained by lower energy prices, investors are starting to worry about deflation.
  • Even the new iPhone couldn’t save retail sales, which were weaker than expected across the board – the first wholesale decline in January.


  • When I wrote about oil prices falling on Monday, it was trading around $85 per barrel and prices sank again to as low as $80 per barrel, but recovered to $82 per barrel.
  • Stocks in Europe were lower, but Greek stocks were down more than 10 percent at one point during the day. Greek bonds also suffered as the yield on their 10-year government bond rose to 7.8 percent.
  • The CBOE Volatility Index, or VIX, rose sharply to 31 percent at the top, reflecting high anxiety among traders who expect volatility to be sharply higher in the coming months. To get a sense of how high 31 percent really is, look at this chart from a few days ago that shows what realized (as opposed to expected) volatility has been in recent years.


  • New rules designed to prevent inversions (when a US company buys a foreign company and moves their headquarters overseas to avoid US taxes) caused pharmaceutical giant AbbVie (formerly part of Abbott Labs) to back away from their $54 billion purchase of Shire, PLC, a British company.
  • Bank of America, along with some of the other too-big-to-fail banks, reported mediocre earnings (better than expected, but they made $168 million last quarter compared to $2.5 billion in the same quarter a year ago). With interest rates dropping like a stone, investors are worried that the main source of profits for banks, net interest margin (the difference between deposit rates and lending rates) will suffer.

In addition to those specific items, investors also think that hedge funds are behind the volatility. This is sort of an old trope that always appears and I am generally suspicious of such difficult to prove stories, but there is some merit this time in my opinion.

Hedge funds have a lot of leverage and when markets move forcefully in short order, leveraged players can end up selling (or buying if they are short) when they don’t want to, at prices that don’t make sense.

Lastly, the Ebola virus is scary. The virus doesn’t have much direct impact on stocks (other than the hazmat suit makers, which have gone up 100-250 percent in the last 10 days), but it’s scary and definitely weighs on people.

The same thing happened with SARS a few years ago, when BP couldn’t contain the oil spill in the Gulf of Mexico, and when a tsunami caused a Japanese nuclear reactor to melt down.

Whatever the reason for the volatility, I don’t believe it’s cause for concern at this point.

We’ve been saying for some time that stocks are overvalued and not many of our clients are all-stock investors. Most people have a bond component and the bond market is doing very well, up almost six percent, as measured by the Barclays Aggregate Bond index.

Finally, remember that our financial planning model, the Acropolis Financial Forecaster, plans for bad times.

The Monte Carlo simulations build in 10 percent drops frequently – when we made your plan, we assumed that we would have times like this even though there’s no way that we could pinpoint which economic surveys, earnings releases or contagious diseases would be the cause.

Volatility and losses were, are, and will always be part of investing. Ironically, without risk, there is no return – just check out the yield on one-month Treasury bills if you don’t believe me.