High Stock Market Volatility for the Next Few Months

Andy Kessler presents five reasons in this WSJ article why the average person should simply ignore the stock market until at least February. He makes it clear that the market is going to be extremely volatile until then — not mainly due to market fundamentals, but more due to cyclical events, which he lists as follows:

• Tax-loss selling
• Mutual-fund redemptions
• Mutual fund cap-gain distributions
• Hedge-fund redemptions
• Margin calls

I would add to that list a new Treasury Secretary, for reasons that I mentioned in this post.

What Kessler is saying is that due to these events, nothing the market does over the next few months is to be trusted. When it has its biggest one-day gain or its biggest one-day loss, it’s not necessarily a reflection of investor confidence.

What Kessler is NOT saying is that the stock market will suddenly turn rosy in February after cyclical fluctuations. Rather, he is saying that after all these shenanigans wrap up the market will more accurately reflect investor confidence and the economy. And those might still be in the toilet.

Kessler makes some good and valuable points. I believe, however, that until the stock market gets a firm reading on how a Chief Executive Obama and a heavily Democratic Congress will impact the economy, market volatility will continue to rule the day. Although some things are already becoming clear, it will take a while for the new administration to get its bearings. I suspect that this will be reflected in the market with extraordinary instability for many months after February.