In several of our recent posts, we have been noting that the economic and market signals continue to suggest that a recovery in 2021 is the most likely outcome, even when temporary bouts of volatility occur (here, here, here). Last week, headlines and media attention were focused on the increase in equity volatility and the decline in equity prices related to several investors needing to unwind short positions and lower their overall market exposure. Some of the media coverage was implying that this increase in volatility could be a sign of a change in direction for the outlook on the recovery.
As part of our macro research process, we monitor price and volatility movements across multiple assets to determine if there is broad-based confirmation of changes in market signals that would suggest a change in the forward economic outlook. After reviewing these data points over the prior week, it appears that for the time being, this is a unique equity-related phenomenon that has not impacted other asset classes.
As a recap, equity prices did decline across sizes and regions last week.
Source: Koyfin.
This was accompanied by a spike in equity volatility as the VIX neared 40 intraday and stayed in the 30s for most of the week.
Source: Koyfin.
Looking across other asset classes, we see much more muted activity.
The CRB commodity Index tracking ETF had a positive return last week.
Source: Koyfin.
West Texas Intermediate (WTI) oil prices were down just over -0.10%.
Source: Koyfin.
Oil volatility increased from the mid-30s to low-40s, a much smaller increase than equity volatility.
Source: Koyfin.
On the fixed income side, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) was down -0.38%, a small decline considering the move in equity prices and equity volatility.
Source: Koyfin.
The yield on the 10-year U.S. Treasury bond decreased 3bps on the week and increased on Thursday and Friday.
Source: Koyfin.
Gold is often viewed as a safe haven and tends to perform well when the outlook for economic growth is negative and real yields are expected to decline. Last week, the SPDR Gold Shares (GLD) declined -0.74%.
Source: Koyfin.
On the currency side, the U.S. Dollar Index (DXY) did increase 0.46% and has stopped declining in the second half of January. This is a trend worth watching, however, it may be related to the exchange rate of the U.S. dollar ($US) versus other major developed countries included in the DXY Index. Some emerging market countries like Turkey, Brazil, and South Africa saw their currencies appreciate versus the $US last week.
Source: Koyfin.
Source: Koyfin.
We will continue to monitor these cross-asset signals to see if they confirm the recent moves in the equity market. If they do not, this is likely a sign of leveraged investors looking to unwind exposures in a difficult environment and when that passes, the trends that were in place will likely go back into effect.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
