- The U.S. equity market has been remarkably resilient since the volatility of Q4 2018. Stocks benefited recently from a host of better-than-expected economic releases, including strong consumer sentiment and jobs data, improving manufacturing numbers and a spike in housing starts since January.
- The stock market’s rise over the past several months also has come with minimal daily volatility, as the chart shows. Since mid-October 2019, the S&P 500 has risen approximately 11%, but experienced only five daily moves greater than 1%.1 (The five days that did see 1%-plus daily moves were clustered in a brief late January-early February swoon).
- Despite the recent upbeat economic news, however, investors may be shrugging off a host of potential threats that could drive volatility higher once again. Several current risks include high and rising equity valuations, souring earnings projections, decelerating economic growth in Germany and Japan and the still-to-be-determined economic impact of COVID-19.2
- The Treasury market appears to be accounting for these risks while the equity markets may not be. The 10-year Treasury yield has fallen approximately 45 bps in 2020, for example, while the 2Y-10Y yield curve has flattened significantly.
- Despite the range of potential warning signs, the U.S. equity market could of course continue its torrid pace for the foreseeable future. With markets still riding high, however, now may also be a good time for prudent investors to consider preparing their portfolios for a potential pullback.
1 Bloomberg Finance, L.P. Data refers to an extended period of minimal daily volatility (October 14, 2019–February 20, 2020).
2 Federal Reserve, http://bit.ly/38LKqjQ.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice, and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. FS Investments cannot be held responsible for any direct or incidental loss incurred as a result of any investor’s or other persons reliance on the opinions expressed herein. Investors should consult their tax and financial advisors for additional information concerning their specific situation.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
All investing is subject to risk, including the possible loss of the money you invest.