Volatility Rises, but Fundamentals Remain Steady

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management; Amit Soni, CFA, Director and Portfolio Manager, New York Life Investment Management

Last week, equity markets tumbled globally, and the S&P 500 finally broke its longest stretch without a correction of 5% in more than 50 years. The index saw its largest one-day move in more than six years, and was down more than 10% from its peak a few days later, an “official” correction.

Stretch of Days since Last 5% Decline

Source: Bloomberg, as of 2/7/2018. Past performance is no guarantee of future results, which will vary. You cannot invest directly in an index.

Treasury yields and inflation expectations moved higher throughout the month of January, and a job report showing the fastest wage growth since 2009 was the final trigger. Large volumes of selling, generated by strategies betting on low volatility, exacerbated the market decline. On Monday, February 5, equity volatility more than doubled, a record move!

Biggest Historical Spikes in Volatility

Source: Bloomberg, as of 2/7/2018. Past performance is no guarantee of future results, which will vary. You cannot invest directly in an index.

We believe that last week was an overreaction to market events, and the impact from these technical, volatility-driven strategies is likely to taper off. The economy remains on solid footing. Recent data suggests robust job growth, a strong manufacturing sector, and healthy consumer confidence – all pointing towards a supportive environment for risky assets.

Even though some data indicates a rise in inflationary pressures, we believe it is far from levels that can be deemed a headwind for the economy. Corporate earnings remain very strong, with the fourth-quarter growth currently at 15%.

With strong earnings, solid macroeconomic data, and an absence of any signs of an imminent downturn in the economy, we view recent market moves as an opportunity to add equity exposure in our portfolios.

Watch This Week’s MainStay Market Minute

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The Standard & Poor’s 500 Index (S&P 500) is an index of 505 stocks issued by 500 large companies with market capitalizations of at least $6.1 billion. It is seen as a leading indicator of U.S. equities and a reflection of the performance of the large-cap universe. The S&P 500 is a market value-weighted index and one of the common benchmarks for the U.S. stock market.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group

Full Bio

Amit Soni, CFA

Director and Portfolio Manager, New York Life Investment Management

Amit Soni is a Director and Portfolio Manager in the Strategic Asset Allocation & Solutions (SAS) team at New York Life Investment Management. He focuses on quantitative and macro-economic investment research and portfolio management for the asset allocation

Full Bio

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