Beyond Bulls & Bears

Persistent Market Volatility

Chris Molumphy
Chris Molumphy

If you’re feeling a little motion sickness from the recent market volatility, you’re probably not alone. Investors have been on a wild roller coaster ride in recent days, as markets have careened through extreme highs and lows. But Chris Molumphy, CIO of the Franklin Templeton Fixed Income Group®, notes that these large market swings may not perfectly reflect the underlying market fundamentals:

“We certainly have witnessed significant volatility, and in many cases, changes in levels and valuations in the financial markets over the past several weeks. However, it’s important to recognize that relative to just three weeks ago, the world in economic fundamentals has really not changed that dramatically. It’s really been the financial markets – and in particular investor sentiment- that has changed.”

Certainly, there are signs pointing to difficulty in the global economy – especially in developed markets. But Dr. Michael Hasenstab, Co-Director of the Franklin Templeton Global Bond Department thinks that the markets may have over-reacted, leading to panic even in some healthier markets:

“…It was the combination of concerns in Europe, the U.S.  downgrade and soft economic activity that really caused a bit of a panic in all markets – even markets that had nothing to do with really any of those central issues. Now, Italy is a very significant country, there are some concerns about their low level of economic growth; however, they have been, over the last years, running a primary fiscal surplus to contain their high levels of debt. And at this point, Italy is nowhere near the camp of Greece or Portugal, which are insolvent… I think the market’s reaction was an overreaction…”

Although European volatility is likely to persist for some time, Molumphy believes that through coordinated efforts, the European Central Bank and government entities will eventually be able to contain the Eurozone debt crisis:

“Our view is that they will be able to contain the situation, but it may well take quite a bit of involvement from the ECB as well as some other government entities. The good news is we feel the ECB does have the potential to do what is needed even if it is a bailout to some degree… but we think it’s going to likely be a volatile period.”

But if the wild ride has left some investors’ hearts pounding, for some experienced investors, it is more due to excitement than fear. While market gyrations have caused some steep equity losses, these are the sorts of times that may present very interesting buying opportunities. Gary Motyl, CIO of the Templeton Global Equity Group notes that even strong companies have been sold-off in the recent panic,

“What we need to do is kind of keep this in perspective and also differentiate what’s happening at the macro level and what’s happening at the micro level… when you look at the market action in the last few weeks… you haven’t seen a real differentiation in stock price performance between those stocks of companies that are really going to be directly impacted by some of these sovereign issues in Europe and those that are going to be pretty well insulated from them.”

Until next time, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton,

“ ‘This time is different’ are among the most costly four words in market history.”