Volatility Returns Amidst Conflicting Economic Reports
Volatility Returns amidst Conflicting Economic Reports
U.S. Stocks retreated last week as oil jumped 8% and the CPI (which is a measure of inflation) came in hotter than expected. The sell-off appeared broad-based with the S&P 500 index losing 0.98%, the S&P 400 Mid-Cap index losing 1.26% and the small cap-oriented Russell 2000 index falling 1.0%. As investors pay close attention to economic readings, not only to judge the future path of the U.S. economy but also in an attempt to time the Fed’s first rate hike, a batch of releases this week have fueled an increase in volatility. The Core CPI released Friday, which strips out volatile food and energy prices, posted a 0.2% increase for the month and a 1.8% gain over the past year. This was the second consecutive monthly gain after losing -0.7% in January.
Working backwards through time, Thursday’s Initial Jobless Claims report which was released last week pointed to some improvement in the April employment report. Initial claims rose 12,000 but, according to Bloomberg, “The 4 week average is little changed, up only fractionally to 282,750, which is 25,000 below the month-ago comparison.” Wednesday’s Industrial Production report showed production in March fell 0.6%, larger than the expected decline of -0.3%, and Tuesday’s Retail Sales report, while gaining 0.9%, rose less than the expected rate of 1.1%.
With U.S. equities selling off over the past week, the CBOE Volatility Index (VIX) gained 9.9%.What is fueling this past week’s increase in volatility? Perhaps it is the fact that the economic data the Fed is looking to before raising rates, namely employment and inflation data, are suggesting that the economy is on firmer ground, while the peripheral data, namely retail sales and industrial production data, are pointing to a slowdown in economic activity.
We believe that while volatility may increase during certain time frames throughout the year, investors should try to maintain a “big picture” perspective. The U.S. economy is continuing to improve when considering changes in year- over- year data. We at Hennion & Walsh are encouraged by what we see as a secular bull market in the U.S. but caution against investors against putting too much of their capital in U.S. Large cap stocks. This is a potential side effect of the six years of growth in U.S. large cap stocks. We suggest that individuals speak with their Hennion & Walsh Financial Advisor or a member of the Asset Management Team to help uncover unintentional overweight positions that may have resulted.
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 4/20/15; Equity Market, Fixed Income and REIT returns from JP Morgan as of 4/17/15.
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