Stocks Hit Hard Again as Volatility Soars

Equity market losses accelerated last week as market volatility spiked. Stocks officially entered correction territory, with both the S&P 500 and the Dow Jones Industrial Average on Thursday closing 10% below their recent all-time highs. International markets followed suit, with many of them suffering their worst week in years. For the week:

  • The S&P was down 5.2%—it’s worst weekly performance since 2016.
  • The S&P Global ex-U.S. Broad Market Index fell 6.3%.

A look beyond the performance-focused headlines showed mixed economic reports in the U.S. While initial jobless claims were better than expected, growth in wholesale inventories in December slowed on a month-over-month basis.

One bright spot last week was the European economy. Both Germany and France reported better-than-expected factory orders and industrial production. However, economic data out of emerging markets was mixed. Brazilian retail sales and Mexican consumer confidence was disappointing, but inflation data out of Brazil and Russia was much better than expected.

In the U.S. equity markets, the sectors that held up well on a relative basis were largely consumer-focused—especially retailers—as consumer spending and borrowing remains strong. Energy stocks underperformed, as oil prices weakened on concerns about overproduction.

Internationally, India outperformed for the week on optimism about the country’s economic growth and accommodative central bank policies. China underperformed, however, as investors worried about the impact of China’s deleveraging campaign on its equity market and on corporate borrowing costs.

In the fixed-income markets, municipal bonds performed well on a relative basis as nervous investors sold corporate bonds and long-duration Treasury bonds throughout the week. Meanwhile, emerging market debt, corporate credit and long-duration bonds all underperformed as interest rates rose and fixed-income investors reduced their risk exposure.

GAIN: Active Asset Allocation

It was the second consecutive week of sizable losses for equities and, as noted above, markets experienced their first correction of at least 10% since early 2016. Both U.S. and global stocks fell by a similar amount, and we remain globally diversified.

The volatility and losses likely seem especially jarring to many investors, given the strong market environment and lack of price fluctuations that had occurred for some time. We will continue to monitor developments closely. Much of the volatility in the past two weeks has been driven by technical trading strategies such as target volatility and risk parity, but we will watch to see if any continued selling becomes less technical and more panic-driven in nature.

Bonds were also down overall for the week. Concerns about potentially rising inflation and comments made by outgoing Fed Chairwoman Yellen fueled fears of relatively aggressive rate hikes by the Fed. Longer-duration bonds and bonds with equity-like characteristics were hit hardest last week, as were other high-yield asset categories like real estate. REITS, for example, are now down approximately 12% from their peak.

PROTECT: Risk Assist

Volatility spiked as equities experienced another week of sizable losses. The VIX volatility index soared 116% last Monday—its highest daily percentage increase ever. The S&P 500 has fallen more than 1% four times during just the past two weeks—matching the total number of -1% days in all of 2017.

Risk Assist models generally de-risked by 10% to 20% during the week.

SPEND: Real Spend

Stock prices fell sharply last week while bonds were flat to down, overall. Despite falling more than 5% for the week, global stocks are still outpacing bonds by approximately 16% during the past 12 months.

Moments like this are good times to remember the purpose of the Real Spend portfolios’ spending reserves—to provide liquidity and buffer short-term volatility in an effort to minimize selling holdings during down markets. Given that we evaluate Real Spend rebalancing activities on a quarterly basis, weekly moves like what we saw last week, in isolation, have little direct impact on Real Spend’s success rates.

Yield-focused assets were also down across the board last week, but saw a few bright spots on a relative basis. For example, preferred stocks fell only about 40 basis points. Additionally, REITs held up relatively well compared to the broader equity market (despite declining by more than 4%).

Market expectations for inflation have risen by around 15 basis points year-to-date, but didn’t budge last week—even though long-term bond yields climbed nearly 10 basis points, with the 30-year U.S. Treasury closing the week at 3.16% (its highest level in nearly a year).

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