Volatility Returns To Global Risk Markets

What market drivers could also impact the credit union investment portfolio?

After an effective 12-or-more month nap, volatility returned to global risk markets in February. For much of 2017 and the first month of 2018, equity markets seemingly traded in one direction. However, in the first week of February, a correction in equity markets finally surfaced.

In our January commentary, we noted that a common concern among top equity investors was rising inflation expectations and long-term bond yields, particularly as it affects stock valuations. The 10-year Treasury yield rose 30 basis points (bps) in January on improved wage and inflation data, higher commodity prices, and more hawkish rhetoric from the European Central Bank; by February 2, the 10-year yield was up another 15 bps to a 4-year high.


February At-A-Glance

  • A correction in equity markets finally surfaced in February due primarily to concerns of rising inflation, higher long-end rates, and tighter monetary policy.
  • S. retail sales data were softer in January, but business sentiment, inflation, and labor market data continued to match/surpass expectations.
  • Fed leaders have suggested the sell-off is small potatoes from a big picture perspective, and gradual normalization is still the plan.
  • The current expansion cycle is now in its 104th month and will soon only trail the 1990s as the longest post-WW2 expansion (120 months).

The move in long-end rates was the primary catalyst for a major sell-off in U.S. stocks, and the next Monday, the Dow Jones Industrial Average fell more than 1,100 points (4.6%). At the same time, implied volatility in equity markets exploded higher. The VIX index tracks S&P 500 options on the Chicago Board Options Exchange, and on February 6, the VIX breached 50 for the first time since the end of the credit crisis. By the middle of that week, the S&P 500 had fallen more than 10% from the recent peak on January 26.

As February progressed, volatility subsided somewhat, and equity markets bounced 5% higher from the February 8 low. That said, anxiousness remains in the markets, which is to be expected following a correction. The economic data trend remains positive, although some recent reports have been softer. Specifically, the retail sales control group, which is used in the GDP calculation, was unchanged in January versus expectations for a 0.4% increase, and the December growth figure was revised lower by 50 bps (-0.2%). Surveys of business sentiment remain relatively robust, and on the inflation front, January core CPI was above expectations at 0.3% month-over-month (1.8% year-over-year). Additionally, recent labor market data revealed further signs of a tighter job market, with the 4-week moving average of initial jobless claims reaching another new 49-year low in February.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.

March 7, 2018

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