Volatility Returns to Markets

May 23, 2017

Early last week, both the S&P and NASDAQ recorded all time highs before tumbling along with the Dow as political concerns rose.[1] By Friday, though, the markets had largely rebounded and steadied. The S&P 500 closed the week down 0.38%, the Dow saw a 0.44% loss, and the NASDAQ reported a 0.61% decline.[2] The MSCI EAFE reported up 0.79% for the week.[3]

 

The CBOE VIX is designed to measure market volatility by using S&P 500 put and call index option prices.[4] For most of the year, volatility in the marke

 

ts has been low. However, the CBOE Volatility Index (VIX) spiked 40% midweek before falling back by week’s end, indicating a possible increase in market volatility.[5]

 

Through the week’s ups and downs, investors followed some other important economic developments.

 

LAST WEEK’S DEVELOPMENTS:

• Solid Regional Business Index

The Philadelphia Fed Business Outlook Survey again pointed to progress in the factory sector. While the consensus range was 16.0–25.0, the General Business Conditions Index-Level reported 38.8.[6]

 

• Strong Corporate Earnings

With 90% of S&P 500 company Q1 earnings reports in, the earnings growth rate for S&P 500 companies remains bright with an average increase of 13.6%.[7] The softening U.S. dollar — down 5% so far in 2017 — is helping companies that sell overseas. A weaker dollar will help companies with foreign earnings, as those earnings are more valuable when converted into U.S. dollars.[8]

 

• Mixed Housing Reports

New home sales remained strong as the housing market index rose 2 points to 70. The data came out well ahead of the 65–69 consensus range.[9] However, April housing starts were lower than expected. Housing starts are now at a 1.172 million annualized rate, after falling 2.6%.[10]

 

• Household Debt Rises

Total household debt rose to a new high, reporting a $149 billion increase to come in at $12.73 trillion.[11] Student loans and auto loans were major contributors to the rising debt:

§ Student loans now make up about 10.6% of all U.S. household debt, rising to $1.3 trillion. Comparatively, in 2003, student loans only accounted for 3.3% of total household debt.[12]

§ Auto loans tighten as balances rose by 0.9%.[13] Auto debt that is overdue by more than 90 days increased to 3.82% of total auto loans in Q1, the highest percentage in four years.[14]

 

WHAT’S AHEAD

 

Economy

Manufacturing output rose 1.0 percent in April, the strongest monthly result in over 3 years. As such, investors will track how the rest of the second quarter shakes out.[15] In addition, we will be interested in this week’s housing reports, hoping for a better handle on where this up-and-down sector is heading.

 

Geopolitical

Financial markets could experience some headwinds as geopolitical situations fester. Concerns over North Korea and political opposition to globalization remain.[16] In addition, Brazil is facing political disruption and a deep recession that could mean problems for companies with business interests in that country.[17] Similarly, continuing political challenges for the current U.S. administration may adversely affect proposed tax reform, health-care legislation, and infrastructure initiatives.[18]

As always, we will continue keeping abreast of market and economic updates. We encourage you to focus on your long-term financial outlook. Should you have any questions, we are happy to help.

 

Agile is an online SEC registered investment advisor. Find out more at www.agilecapital.us

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