A lot can happen in two weeks

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

A lot can happen in two weeks – and you don’t have to be a fan of the great romantic comedy Two Weeks Notice to know that – just take a look at the economy and markets. (I do believe Sandra Bullock and Hugh Grant are both incredible comedic actors!)

Think about it, in the past two weeks we have contended with:

  • The S&P 500 Index (S&P 500) making a new, all-time high (Chart A)
  • Q1 GDP growth coming in at a much better than expected 3.2%
  • The VIX – Wall Street’s “Fear Index” – spiking 50% (Chart B)
  • The US unemployment rate falling to a 50-year low of 3.6%
  • The S&P 500 dropping 130 points, or 4.4%, peak to trough

Chart A

SP 500 all time high

Chart B

Fear Index VIX

The torrent of good news, bad news, and market volatility begs the question, what is going on? In a word – or in a few – concerns over US/China trade relations bumped up against strong economic growth and bullish investor sentiment. Said more plainly, the US economy has been surprising to the upside and that strong performance has been reflected in a robust rally for US equities and very bullish investor sentiment. So, when President Trump took a surprisingly hawkish tone toward China many investors quickly looked past strong near-term economic performance and began to price in a potential, trade war driven, economic slowdown – and did so in pretty jarring fashion.

Bumpy markets are never fun, and we do expect volatility to persist. We also see the US and China resolving their differences over trade. For now, we remain optimistic on the US economy and US equities.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

Volatility vanishes (again), but it should be back (again)

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

More than once last summer, we were asked our thoughts on the early 2018 spike, and subsequent drop, in market volatility as measured by the VIX, Wall Street’s “Fear Index.” We noted we weren’t surprised by the return of volatility, an accelerating economy and rising rates were expected catalysts, nor its departure. We also believed volatility would be back, and back it was in the fourth quarter, before it vanished again. Given the rather volatile behavior of late – well, market volatility – we thought now was a good time to touch base on the topic.

To back up, in early 2018 the VIX spiked to 40 and the S&P 500 Index sold off sharply on a January jobs report that showed greater than expected wage inflation. While the economy and the market welcome modest inflation, an ever-present concern is accelerating inflation that forces the Federal Reserve (Fed) to raise interest rates aggressively, ultimately pushing the economy into a recession and stocks into a bear market. When there was little inflationary follow through post the January jobs report, and economic and earning reports continued to top expectations, volatility declined sharply and the market rallied strongly. That is until Q4 as investors grew concerned the Fed would raise rates and shrink its balance sheet more than economic and market conditions merited, and the US and China would enter a full blow trade war, the VIX spiked and stocks corrected. Then, as the Fed walked back its hawkish talk on rates and its balance sheet, and we received more good news than bad on the state of US/China trade negotiations and economic data came in largely as expected, the VIX peaked and the S&P 500 bottomed in late December. Since late December, the VIX has collapsed 23 points and the S&P 500 has rallied 19% – see the below chart for a look at volatility through 2018 and into 2019.

CBOE Volatility Index

While we welcome the move higher in the S&P 500 and the decline in the VIX, we doubt we have seen the last of market volatility, with potential catalysts including better than expected economic growth and US/China trade relations. However, a bumpy market isn’t a bear market, and as long as fiscal policy and monetary policy remain accommodative, and inflation contained, US equities should be biased higher.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet