Despite the market's positive returns during the quarter, stocks experienced increased volatility. The first half of the quarter the market was up mid-single digits, but the latter half had the market giving back much of the appreciation. Furthermore, the CBOE's (Chicago Board of Options Exchange) Volatility Indexi , commonly referred to as the VIX Index, increased over 40% during the quarter. What accounts for this increased volatility? In our opinion it is because investors fear the Federal Reserve's ultra-loose monetary policy may start to taper off later this year or early next year, and less liquidity might have negative influences on the capital markets.
The Fed's excessive liquidity program (aka: Quantitative Easing) is analogous to performance-enhancing stimulants for athletes. For those that use or rely on them, performance is markedly better for a period of time. However, when the stimulants are removed performance is assuredly worse, and being caught relying on them is at best embarrassing and at worst disastrous. Witness the fall of former great cyclists and baseball players after being discovered unwisely consuming the enhancements. Many investors today are consuming the Fed's monetary enhancements and performing well, but what happens when injections stop? Continue Reading »