The stock markets in the US clearly show elevated volatility as the swings have now extended into the third week, said Jonathan Corpina of Meridian Equity Partners. One of the most important things that investors need to learn is to live with is the heightened uncertainty and volatility because this is the “new normal.”
Economic growth has not been very strong in the US and internationally, earnings growth has been tepid as well so far this year. Moreover, the jury is still out about a possible rate hike by the US Fed next week and investors do need to get used to the uncertainty. That said, there’s still room for a pullback as investors are reluctant to put money back amid the continuing volatility in the market, he said.
Amid the raging speculation about a possible rate hike, Wilmington Trust has maintained its exposure in stocks, said Luke Tilney. The current heightened volatility has also been caused by uncertainty about growth in China’s economy to the degree that those uncertainties have been factored in over the past few weeks in stock pricings but Wilmington believes risky assets are the place to be, he added.
Volatility in the options/derivatives markets remain quite elevated, which shows the market expects volatility to remain high, said Amy Wu of RBC Capital Markets. Compared to the summer, when markets were fairly range bound, the sudden jump in VIX (volatility index) took people by surprise. Investors probably forgot VIX could ever hit levels that it has hit now. If the Fed indeed raises rate next week, investors at least would have one of the uncertainties off the table, she noted.
Asked if VIX itself is part of the problem because many analysts believe some of the extreme moves that happen in the derivatives market strongly influence the movement of stock prices in the spot market, Amy said in the short term the answer is an absolute “yes.”
When investors talk about the VIX, they also talk about the volatility of the VIX being something that continues to move prices to extremes. However, fundamentals take precedence over longer horizons. Investors are currently considering selling “put options” as they expect prices to decline from here (like hedge fund manager David Tepper of Appaloosa Investment said he would be buying at 15 percent lower from current levels), she explained.
Asked if the general economy or a stronger dollar is driving global oil prices, Jonathon said till six months ago there was this clear correlation between market moves and oil moves, but has become very disconnected now. The volatility in oil prices clearly suggests the pull away from equity to crudes is in effect right now. The current strategy is to wait for oil prices to drop further when buyers come in to buy in dips pushing the price up in the $50-$52/barrel range that was seen during the last stability before prices tumbled, he concluded.
You can watch the video here.