Friday’s job report was well received driving up equity markets that have been shaken by previous signs of inflationary pressures. At the March 9 close, the S&P 500 rose 1.7% for the day to 2,786.57and the MSCI AWCI rose 1.12% to 525.445. Fixed Income was down for the day with AGG dropping 0.19% and treasuries declining as the 10-year rate rose 4 bps to 2.90%. The 2-10 treasury spread continues to remain off its Jan 3, 2018 low of 50 bps as fears of recession appear to be pushed off by investors.
Today’s topic is Investment Potential. This simple concept has eluded return chasing investors since the invention of equities. All great investors look for investments with great potential. The key is understanding the catalysts for unlocking the potential. This concept is illustrated by the recent decline of contra-volatility alternative investments as the VIX spiked in February. Many investors in these products saw large price declines and sold out to try and salvage some of their investment value. As a trader, this may be a good stop-loss strategy, but as an investor, the response should have been to buy more. One contra-volatility investment, XIVH, has a history of doing very well in the face of low volatility. This security dropped significantly ($82.30 to $11.97 at close) with the February spike in the VIX. As an investor, this would be a great opportunity. We calculated the impact of this drop to mean a 35% investment return potential by rebalancing to the targeted allocation percentage, even if the security was purchased at its peak price. Historically, this potential was achieved in 12-18 months. No one can predict that this potential will be realized, but the forces that drive stable markets appear to be returning and creating the catalyst to see this potential return achieved. Measuring the portfolio by the loss incurred in XIVH would be a rookie mistake. The real measure is how much potential have we added to the portfolio by playing the volatility of this investment.