PMC Weekly Review - September 16, 2016
A Macro View – Taking Volatility in Stride
So we saw a return of volatility in the equity markets this week, and even the bond markets were affected. Although many investors have described markets over the past year as volatile, the fact is that other than a bout in January and February, actual volatility has been quite low. Even with this week’s spike, this is not a roller coaster market relative to what we experienced routinely over the past few years.
The proximate cause of this week’s volatility was triggered by concern that the markets had misjudged the timing of the Federal Reserve’s intent to raise short-term rates. Although it may not matter much in the greater scheme of things whether the Fed raises rates 25 basis points now or in December or January, traders and momentum investors feed on such things.
But the abrupt shift in expectations (based on an unscheduled speech by one of the Fed’s board members) was enough to trigger sharp selling, followed by a market rebound, followed by some more selling.
The movement in Apple’s share price (the world’s largest company by market cap) was a case in point, as it moved by more than 2% a day for five days in a row. Some of that movement could be attributed purely to the release of the new iPhone 7, but moves of such magnitude for days on end point to the general volatility that beset the markets.
That said, without fuel in the form of swiftly shifting fundamentals, such volatility usually burns itself out, and this week was a mild version. We may be in for more ups and downs, especially in the waning weeks of an election period that is full of bombast and short on substance. But that is occurring against a backdrop of steadily improving economic fundamentals, including low unemployment, and (for the first time since before the 2008-2009 financial crisis), a modest increase in average wages that is not yet being eroded by a commensurate rise in inflation. After many quarters of weak revenues and negative earnings, major companies (as represented by the S&P 500) appear to have turned a corner, and we again are witnessing positive momentum. That will be tested in a few weeks when companies begin to release third quarter earnings, but the trend appears to be firmly in place.
So while more modest volatility may be in store, nothing over the past week has shaken the basic narrative of improving fundamentals and a stable economic environment.
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