Weekly Update

Risk Rises

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Published April 14,2017


This week brought the return of geopolitical concerns to the stock market. The volatility “fear” index spiked in the wake of the U.S. bombing of Syria, deployment of a U.S. warship to the waters off North Korea, and tougher talk from the Trump Administration toward Russia. It’s been a good six months since the stock market has found anything to worry about.Uncertainty over the outcome of the U.S. presidential election back in September/October was the last bout of moderate angst (shown with the red arrow on Chart 1 below). Prior to that it was the Brexit vote in June (blue arrow below).

Chart 1: U.S. military actions breed increased market risk

U.S. military actions breed increased market risk

Prior to this week stock market volatility had been very subdued all year, reaching low levels not seen in a decade (noted with blue boxed areas). You can see on Chart 2 that this week’s spike in volatility (green arrow) is still very modest compared to prior bouts of fear.

Chart 2: Volatility remains very low by historical standards

Volatility remains very low by historical standards

Stocks themselves have held up OK, not registering any notable panic at all. Every dip in prices continues to be bought – at least modestly so – with investors looking to the upcoming flood of quarterly earnings and company outlooks to support (or not) the current market prices.

Market Update

Stocks spent a sixth week trending gradually lower with geopolitical concerns increasing investor uncertainty. This week also brought the first wave of earnings announcements. Investors are looking for earnings to help justify the market rally since November, especially now that the hoped-for Trump policy changes appear to be further out in time than originally expected by the market. Monday began with a flat session with investors appearing to wait for earnings coming later in the week and little news outside of oil prices continuing to rebound. Tuesday gave us a glimpse of investor nervousness with the VIX volatility (fear) index pushing upward for the first time in months while safe-haven U.S. Treasury bonds jumped higher; both actions displaying the increasingly cautious tone of the markets. The stock indexes, however, barely moved with a -0.1% shift on the day. Wednesday saw a larger -0.4% fall. President Trump perplexed investors with comments that he favors a weaker U.S. dollar and also that he will pursue a revision in healthcare before tackling any change in the tax code. It is the change in the tax code that has underpinned much of the market rally since the election. So investors clearly fretted over that shift in focus. Stocks slid a further -0.7% Thursday to end the holiday-shortened week with a third straight daily loss. Earnings from the big banks came in solidly. However bank stocks failed to register gains as the commentary around the earnings announcements focused on dampening expectations for the banking group going forward. Markets have been hoping for stronger bank earnings as interest rates rise and also for relaxed regulation on the group. Both of those assumptions have lost ground this week as banks have dissected their earnings outlooks.

For the week, the S&P 500 (SPY) fell -1.14% while the Nasdaq 100 (QQQ) followed suit off -1.19%. The small-cap Russell 2000 (IWM) fell to the lower end of its four month range with a -1.33% weekly loss.

Warm wishes and until next week.