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Macro

Interpreting market volatility


Key points

  • Stock market volatility remains below its long-term average, even after last week’s spike. This is not a sell signal, in our view.
  • Global stocks declined last week amid U.S. political turmoil. Oil rebounded and economic data signaled a broadening recovery.
  • Oil markets expect OPEC to officially extend its production cut this week and have already partially priced it in, we believe.

Wall Street’s fear gauge spiked last week amid Washington turmoil. Yet the VIX remains below its long-term average of around 20 after a stretch of near-record lows. This isn’t a signal to sell or of imminent sustained higher volatility, in our view.

S&P return following VIX daily closings below 14, 1990-2017

S&P return following VIX daily closings below 14, 1990-2017

Sources: BlackRock Investment Institute and Thomson Reuters, May 2017.
Notes: The chart shows the range of forward returns for the S&P 500 after dayson which the VIX closes below 14.1. This level corresponds to the bottom quartile of VIX closing levels since the VIX’s inception in 1990 (1,719 out of 6,881 trading days). The bars show the upper quartile, lower quartile, maximum, minimum and average S&P 500 forward price returns for the subsequent three and 12 months.

The VIX represents current near-term stock market volatility levels. Very high VIX levels have been reliable buy signals. The opposite isn’t the case. Low volatility tells us little about the direction of future equity returns. There is a wide range of returns in the three- and 12-month periods following VIX closes below 14.

Focus on fundamentals

Periods of low volatility also do not imply that higher volatility is imminent. Low-volatility periods historically have lasted a long time. They have generally occurred amid economic expansion and predictable monetary policy, both of which we see now. Low volatility today likely in part also reflects investors seeking income by selling volatility in options markets.

We believe a steady economic environment should help keep equity market volatility relatively low, with a sustained and synchronized global expansion in full swing. We see few signs of late-cycle equity market complacency, with diverse leadership in major markets. Yet we believe investors should be wary in asset classes where low volatility has resulted in crowded trades.

A move to a new regime of extended higher volatility would be negative for risk assets. It’s impossible to predict what could trigger this but candidates include a credit crunch in China and a much more aggressive pace of Federal Reserve tightening. Neither is our base case. We also do not rule out short-lived volatility spikes on risks such as further U.S. political turmoil. For now, we believe equity investors are being compensated to take risk, particularly outside the U.S. Bottom line: Look beyond short-term volatility and stay focused on fundamentals.

This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 22, 2017, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

©2017 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Prepared by BlackRock Investments, LLC,member FINRA.

Not FDIC Insured | May Lose Value | No Bank Guarantee

20170522-163162-451586

This article is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this article are solely those of the author and/or BlackRock and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


13279




Technical Analysis

Monetary Policy - A Religion Without Sin


As many commencement speakers these days point out it is only natural for all of us, as human beings, to criticize “the man in the arena.”  And so it is with the Fed and other central bankers who have taken upon themselves to play God with taxpayer money since the financial crisis.  Only He, of course, is perfect.  Sadly, it looks like Rube Goldberg rather than intelligent design appears to have his hands on creating the monetary contraptions the world’s central bankers have made to save the world from itself.  The list of unintended consequences of such broad experimentation is almost too grand to enumerate here but it is not limited to punishing innocent savers, enriching the rentier class, and providing little incentive for companies to invest in their own businesses rather causing them to issue debt to buyback stock.  This was all done, like most social engineering schemes, with the best of intentions.  What’s worse for those of us who ply our trade in the art and science of managing money, is that it has accelerated the movement toward passive management and away from active managers.  Some might consider this no great loss in the scheme of things, unless one looks, of course, at the valuations of so many of the stocks that populate the most popular indices.  The “costs” of passive investing to the investing public will be largely invisible until the market starts to falter at which time they will become obvious.  Remarkably, one-third of the stocks in the Russell 2000 have not earned money in the past 12 months, a level normally only seen in recessions.  The percentage of non-earners in the Index has been stubbornly above 30% since 2013.  Is it any wonder that the correlations of returns have been so high and the dispersions of those returns so low?  One can’t help but be reminded of the words of a titan in the world of economics, Alan Meltzer, who passed away earlier this month.  “Capitalism without failure,” he said, “is like religion without sin.  It doesn’t work.”               

 

 

Inflation A Key Element In The Underperformance Of Active Vs. Passive

 

As Central Bank Balance Sheets Have Expanded Active Managers Have Suffered

 

Hedge Funds Continue To Trail The S&P 500 Index

 

 

 

Strategas Research Partners' Institutional Investor-ranked Research Team works to identify the major themes with broad implications for global financial markets. Strategas covers the broad investment landscape, with published reports discussing Investment Strategy, Economics, Washington Policy, Quantitative and Fixed Income research. The team's thematic and macro-driven approach relies on empirical data as well as fundamental and technical research to provide readers with an integrated investment strategy for a variety of time horizons.

This article is from Strategas Research Partners and is being posted with Strategas Research Partners’ permission. The views expressed in this article are solely those of the author and/or Strategas Research Partners and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


13278




Stocks

Start Your Engines


The stock market got tripped up last weak as talk of impeachment entered the mix, yet it didn't fall flat on its face.  On the contrary, it soon found its balance and put together another buy-the-dip response that was, well, just a peach.

A 1.8% decline last Wednesday was followed by a combined 1.1% gain on Thursday and Friday.  When it was all said and done, the S&P 500 dipped just 0.4% for the week.  That wasn't bad at all given the negative tone of the political headlines and the continued underperformance of the financial and transport stocks.

The latter groups need to get it in gear, though, if this market is going to drive to new highs in convincing fashion.   At the moment, it's just idling near record highs, having been restrained by narrow leadership and valuation concerns.

The market's engine is running again this morning, but as of now, it sounds more like a Toyota Prius than a Harley Davidson.  To wit, the S&P futures are up two points and are trading 0.1% above fair value.  

Oil prices ($51.05, +$0.72, +1.4%) continuing to run on optimism over the possible extension, and deepening, of production cuts at an OPEC/non-OPEC meeting later this week have helped prop things up.

Even so, it's a pretty neutral opening indication, which fits the script on two levels.

First, today's headlines are a hodgepodge of items that are interesting in their own respect but don't exactly have market-moving impact.  Secondly, traders recognize there are other items on tap this week contributing to a wait-and-see mindset.

President Trump's trip abroad is being followed closely by the media.  Reports of a major arms deal with Saudi Arabia have been the highlight so far.  That is giving many of the defense stocks a nice boost, which will be a support for the industrials sector.  Still, the broader market seems to have contained its excitement for the news.

Similarly, it isn't getting too fired up by the news that Mark Fields will be replaced as CEO at Ford (F), that Huntsman (HUN) and Clariant (CLZNY) will be tying up in a $14 billion all-stock merger of equals, and that North Korea conducted another missile test.

There is a sense that the market is waiting to see how things trade following last week's roller-coaster activity, cognizant that there could be some market-moving items developing as the week unfolds.

The featured lineup of tradable events includes:

  • The Trump Administration's budget proposal, which is expected on Tuesday
  • A House Oversight Committee hearing on May 24 to investigate further the Trump-Comey interactions
  • The release of the FOMC Minutes for the May 2-3 meeting on Wednesday
  • The Congressional Budget Office presumably releasing its scoring of the House GOP's health care replacement bill on Wednesday; and
  • The OPEC/non-OPEC production meeting on Thursday

Tucked in between will be several speeches from Fed officials, and, of course, it won't be lost on traders that a holiday weekend beckons on Friday.

There is much work still to be done, however, before the holiday starts.  The key is in the ignition, yet it remains uncertain if a relatively quiet hybrid start will give way to a V8 finish.

--Patrick J. O'Hare, Briefing.com

 

This article is from Briefing.com and is being posted with Briefing.com's permission. The views expressed in this article are solely those of the author and/or Briefing.com and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

13277




Macro

Weekly Market Recap


The week in review

  • Industrial production increased 0.98%
  • Housing starts decreased to 1,172K SAAR

The week ahead

  • Flash Markit Mfg. PMI
  • FOMC minutes
  • 2nd revision of 1Q GDP

Thought of the week

After years of underperformance amid falling commodity prices, depreciating currencies and uncertainty surrounding Chinese economic growth, investors are significantly underweight emerging market (EM) assets in global portfolios. However, with commodity prices stable and EM currencies supported, EM should also participate in the recent uptick in global growth, and investors should reflect on whether or not they have appropriate exposure to this EM rebound. Investing in EM can come in different forms, and various factors affect each asset class differently. Given the cyclical global environment, we prefer EM equities over EM local debt and U.S. dollar denominated EM debt (USD EMD). EM equities stand to benefit the most from improving economic growth as this should translate into improving earnings, and valuations are reasonable despite the rally that started in 2016. Within EM equities, we prefer cyclical sectors, which results in a regional bias in EM Asia given its higher exposure to such sectors. EM local debt is a bit more idiosyncratic in that we prefer “highflation” countries, such as Brazil and Russia, due to waning inflationary pressures translating into interest rate cuts from central banks. The case for USD EMD is more complicated, as spreads have compressed materially through the rally, and EM USD sovereigns carry moderate interest rate risk given their longer duration. After years of disappointment, we believe that the bottom for EM assets is behind us, and investors should now reconsider their limited exposure.

 

Global Investment Management

J.P. Morgan Asset Management (Investment Management) is a leading investment manager of choice for institutions, financial intermediaries and individual investors, worldwide. With a heritage of more than two centuries, a broad range of core and alternative strategies, and investment professionals operating in every major world market, we offer investment experience and insight that few other firms can match.

  • A clear focus on managing client assets and delivering strong risk-adjusted returns
  • More than 1,200 investment professionals providing strategies spanning the full spectrum of asset classes, including equity, fixed income, cash liquidity, currency, real estate, hedge funds and private equity
  • Leadership positions in the U.S., U.K., Continental Europe, Asia, and Japan

J.P. Morgan Asset Management is the marketing name for the investment management businesses of JPMorgan Chase & Co. and its affiliates worldwide.

This article is from J.P. Morgan Asset Management (JPMAM) and is being posted with JPMAM’s permission. The views expressed in this article are solely those of the author and/or JPMAM and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

13276




Stocks

What's on Tap Weekly Calendar


Monday May 22nd

Economic Calendar: 

·      8:30 AM ET                 Chicago Fed Nat Activity Index for April

·      10:00 AM ET               Fed’s Harker speaks in Philadelphia

·      10:30 AM ET               Fed’s Kashkari to speak at Minneapolis Fed conference

·      9:10 PM ET                  Fed’s Evans speaks in Shanghai

 

Earnings Calendar:

·      Earnings Before the Open: BAH, EXXI, MICT, NTWK, TWMC

·      Earnings After the Close: A, CRMT, LXFT, NDSN, RAVN, RMCF

 

Other Key Events:

·      JP Morgan Global Technology, Media and Telecom Conference, 5/22-5/24, in Boston

·      UBS Global Healthcare Conference, 5/22-5/24, in NYC

·      Electrical Products Group (EPG) Conference, 5/22-5/24, in Florida

 

Tuesday May 23rd

Economic Calendar: 

·      7:45 AM ET                 ICSC Weekly Retail Sales

·      8:55 AM ET                 Johnson/Redbook Weekly Sales

·      9:00 AM ET                 Fed’s Kashkari speaks with reporters in Minneapolis

·      10:00 AM ET               New Home Sales MoM for April

·      10:00 AM ET               Richmond Fed Manufacturing Index for May

·      4:30 PM ET                  API Weekly Inventory Data

·      7:00 PM ET                  Fed’s Harker speaks in New York

 

Earnings Calendar:

·      Earnings Before the Open: AZO, CBRL, DSW, ECC, EVLV, KIRK, TOL

·      Earnings After the Close: BRS, HEI, INTU, OOMA, TCS, TLYS, TTWO, UVV, VSAT

 

Other Key Events:

·      JP Morgan Global Technology, Media and Telecom Conference, 5/22-5/24, in Boston

·      UBS Global Healthcare Conference, 5/22-5/24, in NYC

·      Electrical Products Group (EPG) Conference, 5/22-5/24, in Florida

·      Wolfe 10th Annual Global Transportation Conference, 5/23-5/24, in NYC

·      German IFO data for May

 

Wednesday May 24th 

Economic Calendar: 

·      7:00 AM ET                 MBA Mortgage Applications Data

·      9:00 AM ET                 FHFA House Price Index MoM for March

·      10:00 AM ET               Existing Home Sales MoM for April…est. 5.67M

·      10:30 AM ET               Weekly DOE Inventory Data

·      2:00 PM ET                  FOMC Meeting Minutes from May 3rd meeting

·      6:00 PM ET                  Fed’s Kaplan speaks in Toronto

·      6:30 PM ET                  Fed’s Kashkari speaks in Wisconsin

 

Earnings Calendar:

·      Earnings Before the Open: AAP, CHS, EV, KLXI, LOW, TGI, THR, TIF, WSTL

·      Earnings After the Close: CSRA, EXA, GES, HPQ, MOD, NTAP, PLUS, PSTG, PVH, SCVL, SPTN, UHAL, WSM

 

Other Key Events:

·      FOMC Meeting Minutes from May 3rd meeting

·      JP Morgan Global Technology, Media and Telecom Conference, 5/22-5/24, in Boston

·      UBS Global Healthcare Conference, 5/22-5/24, in NYC

·      Electrical Products Group (EPG) Conference, 5/22-5/24, in Florida

·      Wolfe 10th Annual Global Transportation Conference, 5/23-5/24, in NYC

·      B Riley 18th Annual Investor Conference, 5/24-5/25, in Santa Monica, CA

·      EuroZone flash PMI data for May

 

Thursday May 25th

Economic Calendar: 

·      8:30 AM ET                 Weekly Jobless Claims…prior 232K

·      8:30 AM ET                 Continuing Claims…prior 1.898M

·      8:30 AM ET                 Advance Goods Trade Balance for April…est. (-$64.0B)

·      8:30 AM ET                 Wholesale Inventories MoM April-P

·      9:45 AM ET                 Bloomberg Consumer Comfort Index

·      10:30 AM ET               Weekly EIA Natural Gas Inventory Data

·      11:00 AM ET               Kansas City Fed Manufacturing Activity for May

·      10:00 PM ET               Fed’s Bullard speaks on U.S. economy in Tokyo

 

Earnings Calendar:

·      Earnings Before the Open: ANF, BBY, BRC, BURL, CBK, DLTR, EEX, GCO, HRL, MDT, NGL, NOMD, RY, SIG, TTC

·      Earnings After the Close: BRCD, CAL, COST, DXC, EGHT, FND, GME, LGF/A, MOV, MRVL, NTNX, PDCO, SPLK, ULTA, VEEV, VNET, ZOES

 

Other Key Events:

·      B Riley 18th Annual Investor Conference, 5/24-5/25, in Santa Monica, CA

 

Friday May 26th

Economic Calendar: 

·      8:30 AM ET                 Gross Domestic Product (GDP) Q1-S…est. 0.9%

·      8:30 AM ET                 Personal Consumption for Q1-S…

·      8:30 AM ET                 GDP Price Index Q1-S…est. 2.3%

·      8:30 AM ET                 Core PCE Q1-S…

·      8:30 AM ET                 Durable Goods Orders Apr-P…est. (-1.5%)

·      8:30 AM ET                 Durable Goods Ex-Transportation, Apr-P…est. 0.3%

·      10:00 AM ET               University of Michigan Confidence, May-F…est. 97.5

·      1:00 PM ET                  Baker Hughes Weekly Rig Count

 

Earnings Calendar:

·      Earnings Before the Open: none

 

Other Key Events:

·      None

 

The content of this post was created by the Hammerstone Group. The Hammerstone Institutional Forum, a chat-based platform for traders, provides subscribers with up-to-the-minute breaking news headlines and instant analysis that drive the market. For more information please visit www.thehammerstone.com. For more information on the stocks mentioned in the Hammerstone Recap, please contact Brian Ducey at brian@thehammerstone.com.

This article is from the Hammerstone Group and is being posted with the Hammerstone Group's permission. The views expressed in this article are solely those of the author and/or the Hammerstone Group and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


13275




1 2 3 4 5 2 1617

Disclosures

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