Weekly Market Commentary: September 7, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Who’s the culprit?

Speculating on who or what is to blame for recent market weakness is a popular pastime right now. Last week, Barron’s said the search for someone to blame is a lot like a game of Clue. So far, the most common conclusions are “the People’s Bank of China with a devalued currency in Beijing,” and “Janet Yellen with a potential interest-rate hike in Washington.”

The article pointed out those theories might be flawed. After all, China’s slowdown wasn’t a surprise. Analysts have been factoring slower growth into their calculations for some time. U.S. rate hikes are highly anticipated and, even though some fear they could tip the American economy into recession (and argue recent stock price movement supports the claim), relatively strong economic data casts doubt on the idea. Some analysts believe the stock market can help predict where a country’s economy is headed. A significant drop in stock prices could be indicative of a future recession and a significant increase could suggest future economic growth.

So, why have markets headed south? Barron’s offered an alternative answer: Investors with volatility trading strategies (and/or a case of nerves) across the globe. The article pointed out the CBOE Volatility Index (VIX), a.k.a. the fear gauge, popped from a low of 13 to a high of 53 between August 18 and August 24:

“That’s higher than when Standard & Poor’s cut the credit rating of the United States in 2011, or at the peak of the European debt crisis in 2010, and seems extreme given the evidence. But volatility isn’t simply a measure of fear. It has been used to manage risk in portfolios that employ sophisticated trading schemes… Although each type of fund adjusts to market changes at a different speed, they all respond in the same way – by selling stocks… Don’t just blame the professionals. For months now, there have been warnings about overcrowding in the market’s best-performing stocks. And, when the market started to tumble in August, these stocks were among the hardest hit…”

So, who caused the market downturn? Take your pick.

Data as of 9/4/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -3.4% -6.7% -3.8% 11.0% 12.0% 4.5%
Dow Jones Global ex-U.S. -4.1 -8.8 -17.0 2.3 1.0 1.0
10-year Treasury Note (Yield Only) 2.1 NA 2.5 1.6 2.6 4.1
Gold (per ounce) -1.5 -6.8 -12.1 -13.0 -2.2 9.6
Bloomberg Commodity Index -1.0 -15.2 -29.0 -15.5 -8.2 -6.4
DJ Equity All REIT Total Return Index -4.6 -9.0 -3.0 6.5 10.6 6.0

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

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