Wealth Management Blog | WrapManager

Volatility Softening; Rate Hikes

The second quarter of 2018 saw a marked decline in volatility from the first quarter. The prevailing feeling in the US equity markets was decidedly more positive. On the whole, the economic picture in the United States improved from the first quarter. Inflation is nearing the Fed’s target of 2% for the Core Personal Consumption Expenditures reading. The manufacturing PMI readings in the U.S. show that the sector continues to expand. The labor market also remains very tight but wage growth remains below 3%. The unemployment rate fell to 3.8% in May, the lowest level in 18 years and the non-farm payrolls have averaged a gain of 207,000 jobs so far this year. On the back of this strong data, estimates for second quarter GDP range from 3-5%, up strongly from the 2.2% estimated for the first quarter. The data is indicating that first quarter was likely more of an anomaly than a trend. The Federal Open Market Committee raised rates for a 7th time in June and conveyed a more hawkish view which indicates that 2 more rate hikes are likely in store for the rest of 2018.

Taking A Look Back at Major Market Milestones of First Quarter 2018 The first quarter of 2018 was anything but a continuation of the market behavior we saw in 2017. After historically low volatility and positive total returns for each of the 12 months in 2017, January continued the trend of higher markets with nearly historic lows in volatility. Then came February. Registering volatility levels below 15 for the month of January, the CBOE Volatility Index (VIX) spiked 116% on February 5, the highest daily move ever recorded. On that same day, the Dow Jones Industrial Average plunged 1,175 points, or -4.6%, its largest single-day point decline in history and the worst day performance-wise since August 2011. The volatility spike was so violent that it even resulted in the shutdown of a widely-traded inverse VIX product. [+] Read More