Obviously, investors are rattled after this sell-off and questioning, what’s happening to the bull market?
Well if you didn’t notice the NASDAQ hit an all-time high on August 29th (8,114), the S&P 500 hit an all-time high on September 20th (2,935), and the DOW hit an all-time high on October 3rd (26,952).
And today, where do we stand? The NASDAQ has declined about -9.5% from the peak, the S&P 500 -7.7% and the DOW -7.51% from all-time highs. This is called a correction, we experienced one in February of this year and from that point, we’re still +4.7% higher off the lows in the S&P 500. These drawdowns are a normal part of investing, however, with bonds and equities falling together this is slightly abnormal. The mix of an overheating economy and rising inflation creates a much higher probability of prolonged volatility into 2019.
The Volatility Index, or VIX, is an index created by the Chicago Board Options Exchange (CBOE), which tracks the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options. Read More on Investopedia
During the market contraction in February, the VIX reached $38 and fell to a low of $10.52 as markets charged back to all-time highs at the end of Q3. Now the VIX is in the low $20’s range as uncertainty persists the more active the VIX will be. What do professionals make of this? Jonathan Golub of Credit Suisse expects the market to pop back despite the recent spike in volatility. Golub, in a note to clients this week, blamed the recent sell-off on what he dubbed “post-traumatic volatility disorder.”
The note read “It is not unusual for markets to remain jittery for some time — perhaps 2-3 months — following a spike in the VIX,” the CBOE Volatility Index spiked as high as 25 this month. In lieu of that, we have issued our guidance on How to Prepare for a Bear Market and previously stated by DWS Partner, Kiernan Easton “I am not of the opinion that Tech’s latest fall signals anything more than a buying opportunity for those with a little cash on standby.”
I’m also in that camp, as the lineup of tech earnings permeate we should experience more investor confidence. On deck for tomorrow October 24th is Microsoft, the company has had a long streak of beating analyst’s expectations, with revenue beating estimates in 19 out of the last 20 quarters.
Distilled down, this week’s earnings could be the catalyst or the dart of pain. We shall see, follow us on Twitter @DWSAdvisors for more updates on this developing story.
– Timothy Hooker, AIF®