Monday, October 18, 2021
After a muted start to the week due to federal holidays, markets in North America continued their sluggish decline before roaring back strongly on Thursday. In the US, the S&P500 was up over 1.71% on October 14, 2021.(1) Across major North American markets, this was one of the strongest days performance wise for the entire year, and put the major indices on track for a positive week overall. At the time of writing (Friday, October 15) markets continue to be climbing.
Some pep was put into the markets step following two key inflation reports from earlier in the week. First, the US Federal Reserve’s September meeting meetings minutes [?] suggested they may begin tapering its COVID-inspired bond purchases as the economy in the United States recovers. Any sign of economic recovery is taken as good news by the markets. Second, retail sales (excluding automobiles) gained 0.8% in September, well ahead of what had been forecast by economists. It just goes to show that despite all the graphs and charts, markets tend to react in hindsight to news.
That being said, the International Monetary Fund also downgraded its US growth forecast this week by one full percentage point, the most for any G7 economy. The IMF cited supply chain issues. Indeed, these issues are dominating headlines as ports are congested as there is due to a serious shortage of long-haul truck drivers, especially in the US.
Bitcoin and cryptocurrency are stealing headlines again. Advocates of the cryptocurrency are hoping that US regulators will not object to the first futures exchange-traded fund, which is set to hit the market on Tuesday. The Securities and Exchange Commission has until Monday night to object. Needless to say, these are incredibly volatile assets. It will be interesting to see if bitcoin (and other crypto assets) will continue to hold favor, especially in light of comments made by JPMorgan Chase’s CEO Jamie Dimon, who is quoted as saying that he “personally thinks that bitcoin is worthless”.
Early next week we’ll have a chance to digest the release of the Michigan Sentiment Index to see if the early prognosticators are correct and consumer sentiment continues to rise. Concerns are over COVID are not over, but as vaccine passports and other health measures take effect there is a sense that economic activity will begin to accelerate as people get back to travel and leisure activities.
Despite some positive news – people are spending more – inflation concerns persist. This is due in large part to the rise in the cost of energy. The price of oil has been on a short-term run, increasing from US$68/barrel to US$81/barrel between September 1, 2021 and October 15, 2021. Higher energy costs find their way into the cost of heating and especially shipping goods, including food. On October 16, 2020 the price of a barrel of oil was US$41.12. No wonder inflation is climbing if energy prices have very nearly doubled in only a single year.
Volatility in public markets has become commonplace. One measurement of volatility that is often used is called the VIX. This is the “Chicago Board Options Exchange Volatility Index”, and it is a real-time index that represents the market’s expectations for volatility over the coming 30 days. Its algorithm uses real time data to generate a forward projection of volatility, or how fast prices change. Some see it as a way to gauge market sentiment and the degree of fear or uncertainty in the market. Others see this as overly simplistic, pointing out that any real-time data reflects the past and accurate predictions of future market movements are difficult if not impossible given the complexity of capital markets.
Regardless, when people talk about market volatility, invariably they will mention the VIX.
There is a lot of math that goes into calculating the VIX, but the short-hand version is this. If the value of the VIX increases, it is highly likely that the S&P500 index on which it is calculated is in decline. Conversely, a decline in the VIX occurs when the market is stable or increasing. This is just one indicator, of course, but over the last two weeks, the VIX has been in a slow and steady decline (see chart below), indicating that perhaps markets are going to remain in stable, growth mode for the foreseeable future.
The problem with indicators like this is precisely that they are forward looking. They do not account for “black swan” or unforeseen events which as we’ve seen can shake investor confidence and rattle the markets.
November 4, 11AM EDT. Fireside chat with Amy Steciuk, Portfolio Manager with Cougar Global Investments. Link to be provided at a later date.
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.