Camelot Portfolios Talking Points

Market Volatility Report

In the past three months, the overall US equities market has been excellent for investors. In this time period, the S&P 500 increased 7.06 percent in 92 days (yahoo finance). Average Daily volume over these three months has been lower than the yearly average daily volume by 4.6% (yahoo finance). This is still within a reasonable confidence level, yet we have seen a relatively consistent decrease in trading volumes over this time period. Many factors are have caused an increase in market sentiment, and investors are starting to buy in upward trending market.

Decreased market volumes and buying investor sentiment in this relatively short time period seem to have substantially lowered volatility below historical market levels. Volatility on the S&P 500, commonly known as “VIX”, has stayed within a very tight range between 10.85 and 14.12 for 3 months (yahoo finance). This is fairly uncommon for the VIX to stay this low, but if the S&P 500 keeps methodically increasing over time, then we will likely see low volatility (yahoo finance).

Last years heightened Volatility levels appeared to have come from 3 market events. These events increased market volumes and decreased the S&P 500 greater than 1% day over day (yahoo finance). The first event occurred on February 11 when crude oil was at its lowest point on the futures market. On this date crude was trading at $26.21 per barrel (Investing.com), and the VIX was 28.14 (yahoo finance). The second historical event was June 24 when the UK had a referendum vote. The VIX spiked to 25.76 (yahoo finance). The third event was November 4. This spike in volatility pertained to US election, and volatility spiked to 22.51 (yahoo finance). Each of these events captured the media headlines beyond the usual business channels and created a buzz of uncertainty for domestic markets at the macro level.

Current market volatility may continue to stay benign, but there are a couple of events in within the realm of possibility that may shift the equities market. Significant movement in market for this year could come from interest rate hikes by the Federal Reserve, individual and corporate tax overhaul, and general elections in Europe.  The chairman of the Federal Reserve, Janet Yellen, has made remarks on the possibility for increasing short term interest rates. This in effect could put pressure on capital expenditures for both corporations and individuals. Currently, financial analysts predict at least one rate hike to three rate hikes in 2017 (Vielma).

Tax reform in the United States is another macro issue because of the effect it has on accounting habits. Many corporations continue to pursue tax havens outside of the United States due to high marginal tax rate relative to other countries. Early reports by a major accounting firm, KPMG, indicate decreased corporate income tax rate from 35 percent to 20 percent (KPMG). This could alter balance sheets for companies with deferred tax assets and deferred tax liabilities (KPMG). Although tax accounting changes are certainly a headache for accounting firms, companies stand to substantially benefit long term. 

The third movement in markets could come from European elections. In 2016, a referendum in the United Kingdom initiated a short term spike in our domestic markets, so it is not out of the realm of possibility if other European countries feel the same way. This year, French elections are held between the end of April and early May (O'Grady). German elections are held in October (O'Grady). Although these elections do not directly affect domestic markets, they may have an effect on large multinational corporations within the United States.

The beginning of 2017 has been positive for markets and volatility. Historical low market volatility and decreased volume activity are a net positive for the equity markets, but uncertainties in monetary, fiscal, and European affairs could cause for fluctuations in the near future.

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Sarah Berndt, Portfolio Manager

Eric Kartman, Research

Matthew Moses, CAP®, President

Drew Steinman, CPA, Trader/Research

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

References

Investing.com. Historical Crude Prices. February 2017. 2017.

KPMG. "What's new in Tax." 2017.

O'Grady, Sean. These six elections are set to change Europe forever. 2016. 2017.

Vielma, Antonio Jose. Probability for June 2017 rate hike jumps after Fed meeting. Dec 2016. 2017.

yahoo finance. "S&P 500 ." 2017.

Disclosure 

The materials presented is for use by professional advisors only.  It is not intended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable. 

The S&P 500 is an unmanaged index used as a general measure of market performance.  You cannot invest directly in an index. Accordingly, performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. A354