Investors Brace for More Market Turbulence After Rocky Week
Many investors remain cautiously optimistic that calm will return, amid signs that expectations for economic and corporate growth remain sound
A week of plummeting shares, record fund outflows and volatility has unsettled many traders and investors, reflecting fears that markets are struggling to find a new equilibrium.
Sparked by signs of increasing inflation, the Dow Jones Industrial Average last week fell more than 5%, extending a fortnight-long selloff totaling 2,400 points. Investors withdrew $22.9 billion from U.S. stock mutual funds and exchange-traded funds during the first week of February, according to fund tracker EPFR Global, the highest total on record.
Volatility soared, with the Cboe Volatility Index, or VIX, a measure of expected swings in the S&P 500, closing Tuesday at its highest level since August 2015 before ending the week up nearly 70%.
Foreign stocks weren’t spared. Major indexes in Europe and Asia lost 5% or more for the week, and a measure of expected volatility in 50 European stocks reached its highest level since June 2016.
Despite the headspinning action, many investors remained cautiously optimistic. Gold, a traditionally popular holding during periods of market turmoil, posted its largest decline in two months, a sign that fear of a deeper plunge is muted. Long-term Treasury yields were little changed, suggesting that the stock fall hasn’t dented expectations that strong economic growth would eventually cause volatility to subside.
“There definitely are more warning signs,” said Thomas Martin, senior portfolio manager at Globalt, an Atlanta money manager. “It’s not as simple as, ‘Everything is fine, jump back in.’”
Among other warning signs: Investors pulled more than $5 billion out of high-yield bond funds during the week ended Wednesday, according to EPFR. Big declines in high-yield energy bonds and other junk debt rattled financial markets in 2015.
Net flows into emerging market funds got off to a weak start in February at $19.4 million for the week ended Wednesday, compared with the multiyear high of $25.7 billion for the month of January.
Copper, a popular barometer of global growth, has fallen to its lowest level in two months, while oil slipped below $60 for the first time this year. Some riskier bonds have experienced selloffs. And some investors have sought shelter in the dollar, boosting the currency above its three-year low.
David Rosenberg, chief economist at Gluskin Sheff & Associates Inc., said he thought the selling will continue. He said S&P 500 futures and options markets were still skewed toward bullish positions as of Tuesday, according to his firm’s analysis of Commodity Futures Trading Commission data. Until that positioning reverses and more fear creeps in, he said, the market is unlikely to bottom. “There’s really nobody…screaming uncle,” he said.
Others expect market calm to return soon.
The gap between yields on U.S. corporate bonds and Treasury debt, known as the spread, has been relatively stable, a sign that the volatility hasn’t yet raised concerns about the creditworthiness of investment-grade companies. The gap widened only slightly this week from its lowest level in more than a decade.
“The equity market seems to have a higher amplification of nervousness, whereas the bond market, if there is an idea the [Federal Reserve] is going to go so much faster than expected, the 10-year Treasury [yield] would have to be higher,” said Nandini Ramakrishnan, global market strategist at J.P. Morgan Asset Management.
Bond funds had positive inflows for the third consecutive week in the period to Wednesday, data from EPFR showed, easing selling pressure on the bond market. Nearly $300 million also flowed out of gold mutual and exchange-traded funds in the same time frame, according to EPFR.
Some analysts said gold’s weakness could be a sign of inflation worries picking up, since gold struggles to compete with yield-bearing assets when the Fed raises interest rates faster than expected. Others said it suggested that investor anxiety over stocks wasn’t leading to broader economic worries.
Some big emerging markets like South Korea and China enjoyed positive fund flows, and there are few signs so far that credit spreads in developing markets are widening in a sign of deepening risk aversion.
“So far, this has been an equity-centered selloff, and not hit other markets,” said Jason Draho, head of tactical asset allocation for the Americas at UBS Wealth Management. As the decline grows steeper, investors are watching to see “if it can go from being a technical selloff to something more fundamental.”