Volatility Picks Up into Year End
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 12/09/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 12/08/14
Volatility Picks Up into Year End
After seven consecutive weekly gains for the S&P500 where the index increased over 10%, volatility is beginning to creep back into the U.S. stock market. Over this same seven week time period the CBOE Volatility Index (VIX) decreased a staggering 47% but since Friday, has posted an 8.9% gain during Monday’s trading and opened Tuesday up an additional 14%. This sharp increase in volatility coincides with negative economic news coming out of Europe and Asia where a German Industrial reading was weaker than expected, Greece is facing political uncertainty and China raised standards for what type of bonds it will allow for use as collateral.
Historically, volatility has been more prevalent in the U.S. Stock market. According to Reid Steadman of S&P Dow Jones Indices, the mean level of the VIX has been 17.1 or 24% higher than this year’s mean of 13.8. While some investors may now only associate an increase in the VIX with negative stock returns it should not be forgotten that it likely could be reverting to more normalized levels.
Heading into year end, U.S. equity investors also begin to consider their tax harvesting opportunities where selling takes place to lock in short or long term losses than can be used to offset realized capital gains acquired throughout the year. This can put some downward pressure on stock prices in December and precedes the positive performance of stock prices during what is commonly known as the “January Effect.”
At Hennion & Walsh we pay attention to the short term movement in the equity markets in order to see if there is a larger trend taking place but will not make short term, knee jerk reactions. Instead we remain focused on the underlying economic fundamentals that fuel long term sustainable equity market growth. So, while there may be selling and an increase in volatility into yearend we believe that it is more likely that some form of a Santa Clause Rally will take place and U.S. stock prices will likely move slightly higher from their current levels.
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