1

Frank Lavin, CLU, ChFC, CFP® 888-373-0364

Paul Castagna, MBA, CLU

Columbus Advisors Market Newsletter- April 10, 2018

Thanks for your patience!

Columbus Advisors thanks you for your patience and cooperation as we changed broker dealers

to Securities America from National Planning Corp. It was a long and complex process and we

are glad to be back to the process of servicing clients and paying full attention to the markets.

We are in the final stage of bringing over historical information on your account. This will be a

brief newsletter as we are completing our move. The next quarter newsletter will be done as

we have in the past.

Executive Summary:

1. The stock market environment is changing from one of low movement to greater

volatility. The reasons are many: later bull market stage, more fear, a return to more

normal levels of volatility after a long period of low volatility. Likely, it was precipitated

by a short seller’s rout.

2. Economic activity remains positive in the economy, with some possible disruptions from

wages rising too quickly; sharp interest rate rises would likely be harmful short term.

3. Trade war fears have negatively affected the market recently; in our opinion, those fears

are overblown.

4. We expect to have a decent year of returns, not superior, although surprises to the

positive or negative are of course possible.

2

Increased Volatility marks the start of a new regime in the financial

Markets in our opinion

Our opinion is that the stock market has entered a new regime in risk. The historically recent

low market volatility has been supplanted by a changing environment of higher volatility. We

believe that we are in a new regime in market volatility and it deserves some discussion. The

CBOE Volatility index (symbol $VIX) is a common measurement of the level of fear and greed in

the stock market. High or rising levels of the VIX are associated with investors becoming more

fearful of stock prices while declining levels are an indication of complacency and a lack of fear.

The index oscillates back and forth as fear and greed tend to ebb and flow. You can learn more

about this index by looking at http://www.investinganswers.com/financial-dictionary/stock-

market/volatility-index-vix-872 to get a better understanding of this index. Chart 1 shows the

recent history of the Volatility index, shown for the period from 2015 when the market started

a correction until the present. The S&P 500 index is shown in Chart 1 below the $VIX. Note on

the $VIX part of the chart how the VIX was in a long term period of decline as marked by the

red trend line drawn in Chart 1. The down trend shown in red in Chart 1 which exhibited low

VIX levels in our opinion was an indication that fear was absent in the market. As you can see in

Chart 1, the level of VIX changed abruptly in the last days of January and moved up and down in

wide swings

While rapidly rising VIX levels are associated with market downturns, and declining index levels

are associated with rising markets, extreme high or low readings technicians say are contrarian

indicators, i.e. excessive VIX levels 40 or higher tend to indicate that the fear is overdone and

levels 12 or below indicates excessive complacency. There is no exact number that tells us we

are in excess, and paying attention to the VIX position does tell us a little about the fear and

greed investors may have at any given time. Note in Chart 1 the days from December 2015 until

the end of January 2017 in Chart 1 marked in red. Note in Chart 1 that the trend of the VIX had

been trending down since 2015 late in the year. Readings below 15 are considered low and

before the end of January rout had been at the 10 level which we consider extremely low. This

was in our opinion a measure of complacency by investors that was not likely to last much

longer. The market had been in an extreme rally mode since the election and also did well in

early 2016. January 2018 started out really well before the first downturn shown in Chart 1 on

the lower half of the chart of the S&P 500 index history. From our experience, the spark that

ignites a sell-off in stocks is only an excuse for investors to protect their profits. The first wave

of selling in late January and early February we believe was a result of the tide shifting in the

economy. The economy was getting into a new orbit of growth and the tax cut caused investors

to start worrying about inflation and rising interest rates. While inflation has ticked up

marginally, it is not running away and part of the initial panic we feel came about because

economic activity was anemic and had started to improve rapidly. The fear was inflation

3

The Wall Street Journal reported in early February that the violent downturn was a result of

investors scrambling to cover big bets they made to sell protection to worried investors. This is

known as a short volatility trade. Here is how it works: Investors were betting that the low

volatility in the market would stay low for some time. They started selling protection in

derivatives, like put options that reward investors for the market going down. These investors

figured that the low volatility would last so they collect a premium for selling the protection.

When the market turned down from the initial fears of inflation, they had to start paying up to

those they sold protection. Because these short volatility investors used leverage to open their

positions, they were losing lots of money as the market went down. To stop their losses, they

started to sell stocks they did not own (short sale) to offset the losses they were making by

being short volatility. This short selling of stocks flooded the market with sales and drove the

market down further. The selling eventually stopped and the market turned around as you can

see in Chart 1 lower position of the S&P 500 index (SPX) in late February and recouped most of

its losses.

The second wave of selling started recently and pundits say that it is a result of trade war fears.

We do believe that fear of a trade war does cause concern for investors. We believe that this

shows up in the relative performance of large company stocks vs. small company stocks and can

be seen in Chart 2 which shows the performance from the peak of the market before the first

downturn in January 2018 from spiraling out of control. Also, we still have labor markets abroad

that produce for us and this is likely to take out the froth in wage growth. The individual

income tax benefits are just starting to take hold for consumers and companies are likely to

report good earnings. At this time our opinion is that the fundamentals of the economy are too

good to have a recession. We will be watching closely for signs that the bull market is over. We

think this is just a correction like most and an overreaction to the fear of a trade war. We

expect the bull market in stocks to continue.

Managing expectations and what to expect

While we don’t think we are at the end of the bull market, we do believe that it is unrealistic to

expect that stocks perform as well in 2018 as they did in 2016 and 2017. We think that a lot of

the economic activity is priced into the market already. If we had to guess, we would expect a

positive bump-up in stocks later this month with positive earnings reports, followed by a period

of poor seasonality of stocks generally from May through the fall. For corporate bonds, as long

as the current credit expansion continues, due to a stable economy, we expect to earn coupon

rates (or interest rates) on our bond portfolios, with little if any price appreciation.

What you need to do

Assuming we manage your assets under an investment advisory agreement, you needn’t do

anything. We have already reviewed with you your risk parameters, retirement and income

goals, and legacy and charitable strategies. Of course, we are always happy to review your

4

accounts and your personal circumstances. Thank you for your business and trust. We value

your business greatly and hold your trust and confidence closely.

Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory Services offered through Securities America

Advisors, Inc. Columbus Advisors and Securities America are separate entities.

Source: StockCharts.com

Source:StockCharts.com