Market Volatility: Mean Reversion

Market Volatility: Mean Reversion

Markets found their way back to volatility, showing a couple of new patterns – including some sector preferences and a muted “risk-off” reaction.


"The most predicted selloff of all time."
James Bullard, President of the Federal Reserve of St. Louis

Market Volatility: Mean Reversion The world’s markets have been put to the test over the past week; U.S. equities moved solidly into the -10% “market correction” zone since the intra-day peak on January 26, 2018. The VIX Index was trading in the 40 range as of mid-afternoon Friday,1 levels not seen for 2½ years, since the correction of August 24, 2015.  U.S. equity markets showed some differentiation, however; declines in the 11 industry sectors of the S&P500 ranged from -4.4% (Utilities) to -11.2% (Energy), suggesting that there were both general and sector-specific forces at work:
 

S&P500 Sector Performance and weights, Feb 5, 2018 (market open) – Feb 9 (1:30 PM ET)
S&P 500 Sector Performance and Weights

Source: Bloomberg, 2/5/18 to 2/9/18.  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.

 

Another feature of note: Treasury yields rose nearly to pre-rout levels immediately after the expected first-days pullback; the intra-day low yield of 2.65% on Tuesday, Feb 6 was followed by a rebound to 2.875% on February 8, rather than staying at a more “risk-off,” lower level.

Each market correction has its own characteristics; rationales fly freely when markets gyrate. Blame is put at the feet of slightly elevated wage growth; technical factors, including the S&P500 index breaching the 50-day and 100-day moving averages; short-volatility ETF liquidity; and equity valuations. Also worthy of consideration: the belated acceptance of a rising rate environment, which had been signaled years in advance by a carefully-communicating Fed. One thing is clear: After this past week, valuations are being rethought for several classes of assets.

 

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