To understand this blog, you need to know what “VIX” stands for. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) volatility index, which shows the market’s expectation of 30- day volatility.
As you know, your Resonate team consistently works hard to continue to earn your confidence and your business. Based on recent market volatility, I have been reading even more extensively than usual. I found this article by Trent Houston, product strategist at Lord Abbett to be particularly informative.
I hope that you do as well.
In last week’s Economic Insights, we opined that recent equity market volatility is an isolated event related to activity in the equity VIX market, not to a sudden rise in fundamental risk. Among the reasons we cited were the strength of the U.S. economy and stable inflation expectations. There simply are no indications of a U.S. economic slowdown. If anything, recent economic data have exceeded expectations more than usual. And the fact that inflation expectations remain benign suggests that the rise in bond yields that we’ve seen recently could be limited.
Strong, long-term fundamentals may even be evidenced in the fact that the credit markets have held up very well over the past week. Investment-grade spreads, for example, were essentially unchanged during the week the equity markets were falling, and high-yield spreads widened only modestly.
Moreover, robust corporate earnings and sales growth have shown no signs of slowing down. In fact, of the 250 companies in the S&P 500 that have reported earnings (as of February 2, 2018) for the fourth quarter of 2017, 76% have beaten earnings estimates and 79% have exceeded sales expectations. Moreover, EPS (earnings per share) is up 12.4% in the same period (compared with the year-ago quarter) and sales are up more than 10%. Those are extraordinary results.
We believe the lack of cross-asset volatility between stocks and bonds over this period, and the strong underlying fundamentals of corporations and the economy, support our contention that last week’s rout in the equity markets was related to exaggerated fears about inflation and the resulting frenetic trading activity in the equity VIX market. The market, after all, is not the economy.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market’s expectation of 30-day volatility, using the implied volatilities of a wide range of S&P 500 Index options. It is widely used as a measure of market risk.
Past performance is not a guarantee or indicative of future results.
Short-term returns may be mixed, but over the long term, spikes in volatility historically have typically represented a buying opportunity when the fundamental backdrop is as strong as it is today.
Until Next Time, Live with Purpose!
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®