It’s Baaack: Volatility Returns as Stocks Swoon
Brace yourself for a wild ride in 2018. The days of low volatility appear to be over.
The Dow Jones Industrial Average, S&P 500, and Nasdaq all closed sharply lower on Tuesday. It was the worst two-day decline for stocks since August.
Several chickens came home to roost. Main culprits were rising bond yields and a sell-off in the health sector.
Amazon (NSDQ: AMZN), Berkshire Hathaway (NYSE: BRK-A), and JPMorgan Chase (NYSE: JPM) announced a new venture designed to lower health costs for their employees. Details were sketchy; it could just be a PR gimmick. It begs the question: what do these companies know about health care delivery? But investors saw the move as a threat to existing players in health services.
U.S. Treasury long-date yields rose. Investors are getting worried about inflation. The Federal Reserve could raise interest rates more times than expected this year.
President Trump gives his first State of the Union address tonight. Investors will scrutinize his comments on trade. The president has taken protectionist steps lately. The prospect of a trade war makes markets skittish.
High valuations are another worry. In addition, a few blue chips have stumbled on earnings. The fears that Wall Street has kept under wraps are coming to the fore.
Are we finally facing a correction? Maybe not yet. We’ll see if bargain hunters jump in tomorrow. But Monday and Tuesday racked up big losses. Last year was tranquil. Now it appears that volatility is back.
There’s an old Chinese curse: may you live in interesting times. But it can be a curse to live in boring times.
The bull market has been steady. Volatility has been low. This “dullness” has fueled greater risk-taking. Now that volatility is rising, analysts worry what happens next.
The S&P 500 index has racked up its longest-ever winning streak without a decline of at least 5%. Bond yields have been edging higher, but they remain near historical lows.
Thank the Federal Reserve, which started a two-day meeting today. Investors nervously await the Fed’s views on inflation, which we’ll hear tomorrow.
Since the financial crisis of 2008, the Fed has been a steady hand on the tiller. It’s not just the Fed. The world’s central bankers have kept short-term rates low. They’ve used quantitative easing to push down bond yields.
Financial assets are worth the discounted value of future cash flows. Central banks have kept the discount rate steady. That means prices have remained steady, too.
But the dialectic is coming into play. For every action, there is a reaction. Extended bull markets carry the seeds of their own demise. Because of low volatility, investors have been shouldering ever greater risk. A sudden reversal in the status quo, such as rising interest rates, can trigger big losses. A spike in volatility could cause vulnerable stocks to plummet.
The CBOE Volatility Index (VIX), the so-called fear gauge, rose again Tuesday after a spike on Monday. The VIX now stands at its highest level in more than five months.
Today, the VIX jumped 4.70%. Funds pegged to the VIX also soared. The iPath S&P 500 VIX Short Term Futures ETN (VXX) rose 3.31%; ProShares VIX Short-Term Futures ETF (VIXY) rose 3.21%; VelocityShares Daily Long VIX Short-Term ETN (VIIX) gained 2.87%; and REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) spiked 9.57%.
Shelter your portfolio, with proven hedges such as precious metals. Raise cash levels. Investors have been enjoying the calm. Now, perhaps, comes the storm.
Tuesday Market Wrap
- DJIA: -1.37% or -362.59 points to close at 26,076.89
- S&P 500: -1.09% or -31.10 points to close at 2,822.43
- Nasdaq: -0.86% or -64.02 points to close at 7,402.48
Tuesday’s Big Gainers
- China Cord Blood (NYSE: CO) +11.70%
Analysts bullish on blood storage firm.
- Autoliv (NYSE: ALV) +8.08%
Auto safety systems firm posts strong earnings.
- Calix (NYSE: CALX) +4.91%
Communications tech firm partners with Verizon (NYSE: VZ).
Tuesday’s Big Decliners
- Scots Miracle-Gro (NYSE: SMG) -14.20%
Earnings of lawn care firm disappoint.
- Polaris Industries (NYSE: PII) -13.29%
Firm’s RV sales slump.
- UnitedHealth Group (NYSE: UNH) -4.35%
New health venture spooks sector.
Letters to the Editor
“Do you think small-cap technology stocks are ripe for a wave of takeovers?” — Andrew D.
Yes, one of the appeals of small-cap innovators is the chance that tech giants will buy them out. This scenario is more likely now that tax overhaul has been signed.
The bill will allow lower domestic taxation of the cash that tech firms have stashed overseas to avoid U.S. taxation. This windfall will fuel a wave of mergers and acquisitions.
Apple (NSDQ: AAPL) said it would bring back $400 billion from overseas. It plans to pay a one-time tax of $38 billion on this cash. The rest of the money is slated for spending in the U.S., including the acquisition of start-ups. I anticipate that innovative companies will get targeted in this buy-out spree, to the benefit of shareholders.
Got questions about breakthrough tech stocks? Drop me a line: email@example.com.
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.