An interesting piece of research caught my eye this week, as highlighted in a little Bloomberg story: the calendar year 2018 is the first year in almost fifty years where not a single broad asset class has produced a positive return greater than 5%.
Of course, you can quibble over the details of the methodology used by Noel Davis Research in their study, and you can point to the fact that this statistic rules out making money by short selling. Yet this study struck a chord with me, because ever since stock markets halted their strongly bullish advance near the start of 2018, all markets have been very flat – there have not really been any great trends anywhere to take advantage of. Not in stocks, not in commodities, not in bonds, not in currencies, not anywhere. We have seen and are still seeing an unusually flat environment. Even though there has been a trend in favor of the U.S. Dollar and against the Euro and the British Pound for some months now, the movements are very small. If you pull up a monthly chart of almost anything and compare recent volatility to long-term volatility, it is hard to find anything that isn’t seeing relatively low volatility, or at least long-term falling volatility.
Good discretionary traders, of which there are admittedly few, may seek to adapt and be more conservative with profit targets. Yet even good traders in this environment will find it extremely challenging to make any truly significant positive return.
In my opinion, a good lesson to learn from this is that traders and investors can only position themselves to benefit from opportunities as they arise. We cannot create the opportunities. If markets are very flat and dull, you can’t make any real money no matter how good you are. This is just a fact of life.
The good news is that in markets, nothing remains the same for long. The longer markets are dull, the more explosive the movement will be when it finally arrives, just like a heavy thunderstorm at the end of a long hot summer.