Volatility: Tariff Talk In Context

Written by: Global Thought Leadership | March 23, 2018

Source: Bloomberg, March 23, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

The Bottom Line

  • It’s human nature to react to each market vibration – but not all vibrations turn out to have the same ripple effect.
  • Consider the past 12 months. Since last March 23, US stocks, as represented by the S&P 500 and NASDAQ indexes, have moved over 2% several times intra-day over that period, after two years of relative calm.
  • Since the beginning of 2018, two periods of disruption, in early February and during this past week, continued the pattern of volatility already established in the previous months.
  • But a look at the CBOE S&P 500 Volatility Index (VIX) suggests that the early February downdraft was a much more notable event than the previous moves. Those days were marked by hypersensitivity to slightly larger-than expected wage growth, the collapse of a VIX-related ETF, and a technically vulnerable S&P500 price level.
  • And while the level of political tension around world trade has ramped up in recent days, the VIX suggests that early February could have been the high-water mark – unless, of course, the -2.5% to -4.5% downdraft in Asian markets on Friday are a harbinger for the US markets in the coming days.
  • Bottom line: It’s important to view each instance of market volatility on its own terms, rather than reacting the same for all.
  • And while the prospect of rising trade barriers with China – and elsewhere – could indeed affect company fundamentals such as profitability, not all companies in all regions will be affected the same.  And therein lies the opportunity for fundamentals-driven, disciplined active managers to seek to separate potential winners from losers in this sort of market environment.


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