This Just In: Making sense of recent volatility
October 10, 2014; Eric Stein, Co-Director of the Global Income Group | Eddie Perkin, Chief Equity Investment Officer
After an extended reprieve earlier this year, market volatility is back – at least for the time being. Eric Stein and Eddie Perkin shared some thoughts on the various cross-currents that have been roiling the market lately.
- By way of context, it should be noted that the low volatility in the market over this past summer was artificial and could not be expected to last indefinitely.
- The theme of the day is divergent economic fortunes (i.e., U.S. improving, Europe weakening) have led to divergent monetary policy regimes (i.e., tightening in the U.S., easing in Europe).
- The market has whipsawed daily as that theme is reinforced or undermined. For example, any hint from the Fed that rate hikes may come sooner than expected boosts the dollar but pressures stocks.
- Against this backdrop, many domestically-oriented assets (excluding U.S. small-cap stocks) have benefited, while exporters along with oil and other commodities have generally struggled.
- The recent weakness in small-cap stocks is likely traceable to increased tax-loss selling by many small-cap mutual funds ahead of their fiscal year-end on October 31.
- On top of all that, corporate earnings season is now upon us, and the November midterm election is approaching. So, market volatility may persist over the coming weeks.
- Recent evidence indicates that global economic growth has been slowing and inflation expectations falling. Most notably, very weak growth and mounting deflation fears are prevalent in the Eurozone.
- Even Germany, Europe’s stalwart economy, has shown signs of weakness – getting “dragged down,” so to speak, with the rest of Europe.
- Economic growth in China, the world’s second-largest economy after the U.S., has continued to slow as well.
- U.S. growth is stronger and has been powering the global economy, but uncertainty regarding U.S. Federal Reserve (Fed) policy has contributed to recent market gyrations.
- With world economies moving in different directions (particularly the U.S. leading and Europe lagging) and global central-bank policies diverging, it is no surprise that we have seen an uptick in volatility in the fourth quarter.
- In addition, ongoing geopolitical risks – the Ukraine/Russia crisis, the ISIS threat and Ebola outbreaks – have been another source of market volatility.
The views and opinions expressed by the authors are their own as of the date indicated, and do not necessarily represent the views of Eaton Vance. Any such views are subject to change at any time based on market or other conditions and Eaton Vance disclaims any responsibility to update such views.