Multi-Asset

Global perspectives - market thoughts for 2018

Global Perspectives - Market thoughts for 2018
Februari 2018

Last year turned out to be a good one for investors and the first time in history that the S&P 500 Index managed to generate a positive return in each calendar month. It was also a year in which volatility was remarkably low.

Last year turned out to be a good one for investors and the first time in history that the S&P 500 Index managed to generate a positive return in each calendar month. It was also a year in which volatility was remarkably low.

 

It is perhaps unsurprising then, that investors entered in 2018 in an upbeat mood with sentiment looking stretched (US investor bullish vs bearish readings at highest level since 2010) and an overbought equity market (record high in the S&P Relative Strength Index). On the 2 February, non-farm payroll data shook investors from their complacency with the release indicating a sizable increase in average hourly earnings – a trend that heightened expectations surrounding US inflation. Higher inflation means increased potential for interest rate rises and that isn’t good news for many financial assets.

 

Rising wages and inflation spooks investors

 


Volatility traded sharply upwards in the following days and two inverse volatility Exchange Traded Products ended up being liquidated. The S&P500 fell over 10% over the course of the next few days and subsequent US Core CPI data served to confirm the reality of higher prices. The well above expectations number for CPI was negative for bonds, as expected, but equities rallied hard after an initial short sell off. The price action perhaps tells us that the normalisation from the volatility shock is more dominant for markets for now than the data. In our view, the February sell-off was a systematic one rather than a correction prompted by a deterioration in economic fundamentals. In that respect, it was akin to the flash crashes experienced in August 2015 and January 2016.

 

 

Risk Disclaimer

Past performance is not a guide to future performance. Values may fall as well as rise and investors may not get back the full amount invested. 

 

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

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Annualised US average hourly earnings and US Core Consumer Price Index (%)



Source: Bloomberg

All information as at February 2018, unless stated otherwise 

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