Markets Should Embrace Volatility While It Lasts

It sounds simple. Buy stocks when there’s news that the U.S. and China are making headway in resolving the escalating trade war. Sell them when the divide seems to be growing. But the problem for markets these days is that it appears as if every positive development seems to be followed closely by a negative one, sometimes within hours, and investors are having a hard time keeping up with the rapid-fire developments.

That can be seen in the 910-point swing between the Dow Jones Industrial Average’s low Monday and its high on Tuesday before ending little changed. To recap, stocks were weighed down early Monday after news broke over the weekend that China summoned U.S. Ambassador Terry Branstad to explain the U.S. request to extradite Huawei Technologies Co. Chief Financial Officer Meng Wanzhou from Canada, where she is being held. Stocks then opened big on Tuesday on the news that U.S. and China officials held a call to discuss trade, followed by a Bloomberg News report that China is mulling a proposal to reduce tariffs on cars made in the U.S. to 15 percent from the current 40 percent — bringing the U.S. back in line with what other countries pay. Progress, right? Alas, the gains turned to losses as the Washington Post reported that the Trump administration is preparing a series of actions this week to call out Beijing for what it says are China’s continued efforts to steal U.S. trade secrets and advanced technologies and compromise sensitive government and corporate computers. (Full disclosure: That was also around the time President Donald Trump said he would be “proud” to shut down the U.S. government if his demands for border security funding aren’t met.) The upshot is that realized volatility is rising at a pace only truly seen twice before in the last five years, once in early February and again in August 2015 during the China growth scare.