Volatility Rears Up
Over the last week, investors saw a material rise in volatility. According to FactSet, the CBOE Volatility Index (VIX), which is designed to produce a measure of constant, 30‑day expected volatility of the United States stock market, surged from 16.36 as of July 31. It climbed to intra-day highs of 28.58 as of August 2 and 59.21 as of August 5, the days of a broad sell-off in equity markets. The VIX closed yesterday at 27.85, which is well above its 30-year average of 19.86.
What Happened?
As we mentioned yesterday in our Insight Extra, “Shock to Equities – Looking Beyond the Noise” the volatility observed last week was attributed to numerous factors. Two factors we discussed were the unwinding of both the “carry trade” and the “crowded trade.”
On Friday the Russell 3000 declined 2%, while the MSCI All-Country World Index ex-USA (ACWI ex-USA) fell 2.3%. This continued August 5 when the Russell 3000 dropped 3% while ACWI ex-USA decreased 3.6%. While this near‑term weakness in broad equity indexes is concerning, these retracements should motivate one to analyze the cause and test convictions for the future.
Over the last week, both the Russell 3000 and ACWI ex-USA have declined, 6.2% and 4.2% respectively. Year‑to‑date, each index exhibits positive returns of 8.6% and 4% respectively.
Looking Through the Trees
The Federal Reserve issued its Federal Open Market Committee (FOMC) statement last Wednesday. The FOMC noted, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.”
Last Friday brought numerous economic reports. The Bureau of Labor Statistics reported the unemployment rate rose to 4.3% in July, modestly above the 4.1% of both consensus and that reported for June.
Separately, the United States Census Bureau reported final Durable Goods Orders for June, which declined 6.7%, versus -6.6% for consensus and May’s +0.1% (revised from -6.6%).
Lastly, S&P Global released its final United States Services Purchasing Managers’ Index (PMI) for July which came in at 55. While this was moderately below June’s 55.3, July’s report continued its monthly expansion to 18 consecutive months.
On the Earnings Front
Per the London Stock Exchange Group (LSEG), 480 companies within the S&P 500 have reported second quarter earnings, which have risen year‑over‑year (YOY) by 13.4%. For the Russell 2000, 1,272 companies have reported with earnings contracting 0.3% YOY.
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Sources: BTC Capital Management, FactSet, LSEG, Chicago Board of Options Exchange, S&P Global
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