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Low Market Volatility For Now

Market Digest – Week Ending 5/12/2017
It was a quiet week for stocks, which extends a recent trend. The VIX, a measure of volatility of the S&P 500, hit a quarter-century low this week. U.S. markets drifted modestly lower while international equities overall managed a slight gain. President Trump’s firing of FBI Director James Comey stoked fears of political dysfunction, but ultimately had little market impact. Earnings season is winding down and is poised to be one of the strongest in recent memory.

Weekly Returns:
S&P 500: 2,390 (-0.4%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.38% (+0.03%)
Gold: $1,228 (+0.0%)
USD/EUR: $1.093 (-0.5%)

Major Events:

  • Monday – The VIX hit its lowest level since 1993
  • Tuesday – Coach agreed to buy Kate Spade for $2.4 billion
  • Tuesday – President Trump fired FBI Director James Comey, increasing political tension in Washington
  • Tuesday – Yelp reported disappointing earnings, citing an ad algorithm problem, which reduced sales from small businesses
  • Thursday – Chicago Fed Chief Charles Evans said he would be surprised if the Fed raises rates more than once in the remainder of 2017
  • Friday – A massive cyberattack disrupted computer systems in dozens of countries
  • Friday – Anthem terminated its merger with Cigna and said it wouldn’t pay a $1.85 billion termination fee

Our take:
The capital markets are extremely calm. Almost creepily so. Despite stocks being at all-time highs, prices to insure against declines are at multi-decade lows. Some are increasing leverage with the thinking that lower volatility should be expected.

Mark Mobius, a Franklin Templeton money manager, made waves this week by suggesting the low volatility was a result of social media and false news. We don’t quite see the connection there, however. In our view, just as market prices go up and down, so does volatility. Stocks are volatile by nature and nothing about that has changed. When designing personalized asset allocation strategies, we’re sticking with long-term volatility assumptions.

Joblessness is very low and corporate earnings are growing quickly. These are good things and are serving to mask political flare-ups. Just like the now nine-year-old bull market, things probably aren’t “different this time,” but that doesn’t mean we shouldn’t enjoy it while it lasts.

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