Markets have continued to tread along, not disrupting the pace set over the past few months with the UK, Japan, and emerging markets showing the strongest returns. While fundamental data continues to support the rise, the real surprise is that this positive move has done so with little volatility.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index
Until there is some kind of major disruptive news, it looks like the market will continue along quietly. We’ll take a look at why volatility has been so low, what factors support the positive outlook and what to expect around the corner.
Rock Bottom VIX
Volatility today is near the lowest it’s ever been – and in periods of low volatility stocks tend to float higher. In fact, this year the S&P 500 has not moved more than 0.2% in roughly 90% of the trading days. This quiet period seems to contradict the political fervor that has plagued 2016/2017 but, while the market may expect change, not much has really changed over the past several months. In fact, what the actual trend may tell us is that, although investors are still quite unsettled regarding what’s next, cold hard fundamental facts are prevailing and guiding the trend forward.
Eurozone Investment Trends 2007-2016
While the media is captivated by 140-character news, global demand has improved significantly. As of March, emerging market growth was 13.9% year-over-year. That trend is echoed in tightened corporate profits and bond yields. The global default rate for high yield bonds fell to 3.6% from 4.3% over the past year. The strength of the US dollar, employment data, and consumer optimism continue to support the Fed rate increase that will likely occur in June. And all the growth has come, despite the fact that corporate investment has been lacking since 2008.
Following May’s G7 meeting, German Chancellor Angela Merkel stated, “The times when we could completely rely on others are, to an extent, over.” Couple the comment with France’s pro-Eurozone vote and a firm handshake – Europe’s collective response to protectionism and strong-arm tactics looks to be one that moves away from the dependence on the US. Forward-looking countries, like Germany and France, are moving forward on their own accord when it comes to global trade. Indeed, with economic growth accelerating and trade deals on the table with multiple regions, the picture in Europe is brighter.
While fundamentals are positive and many countries are embracing the trend, broad political polarization and some extremist groups threaten to create a splash in otherwise calm waters. Whether it’s Trump’s Russian scandal, Putin’s Crimean land grab, Erdogan’s threat to destroy Turkish democracy, or a nuclear threat from North Korea; these and others have the potential to derail the current trajectory, and so we still expect volatility to spike should any similar threats become more prevalent.
But all is not doom and gloom. Some are saying the effects of Trump and Brexit are fostering a “newfound sense of cohesion”. And although there are significant political threats, global fundamentals appear to be robust enough to right a disrupted path. Stick the course, and keep your investments diversified, well aligned with your time horizon.