Monthly Brief March 2018 – US Equity Volatility
March 2018 saw another month of investors looking to reconcile healthy global economic and corporate reports with the uncertainty of the future direction of public policy. Can this economic environment persist, despite the growing distractions? And how might this impact interest rates and monetary policy? While these topics are difficult to assess in their own right, the biggest hurdle may be investors’ ability to decipher the abundance of rhetoric regarding future political and fiscal policy initiatives. And, between the current administration’s aggressive communication style and a saturated media fighting for viewership, “creativity” in reporting appears to have added to the challenge. In an ironic twist, the policy-maker providing the clearest guidance for potential future outcomes may very well be the new Federal Reserve Chairman – quite a change from previous years! Despite this noise, it continues to be a period of strong, synchronized global growth, healthy corporate earnings and, by many measures, reasonable (though not cheap) equity valuations. While capital markets typically resolve this type of environment in a positive fashion, the “noise” is likely to result in higher volatility being with us for yet some time.
CHART OF INTEREST – US EQUITY VOLATILITY
There has been no shortage of discussions regarding the increased volatility that has followed the January peak in equity markets. While the number of days with large moves has certainly increased during 2018, undoubtedly, the historic calm of 2017 has further emphasized this first quarter uptick. As the chart below shows, it had been over 50 years since the S&P 500 Index experienced as little volatility as in 2017, as measured by changes in index points of greater than one percent, up or down.
And, while the frequency of triple digit daily moves in the Dow Jones Industrial Average has also increased, they aren’t quite what they used to be as a 100 point change twenty years ago had roughly three times the impact in percentage terms as the same 100 point move today.
While increasing volatility typically reflects investors’ uncertainty about economic conditions, it is far from a perfect guide. Can markets resume the uptrend, such as in 2016? Or, will currently favorable economic forecasts prove to have been too optimistic?
James Ferrin, CFA
Chief Investment Officer
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