Volatility has been conspicuously absent from asset markets for most of 2013. Even during the brief pullback from late May to late June volatility levels didn’t come anywhere near where they have been during other flashpoints over the past several years. It’s been an unusually calm summer – but whether the gentle breezes of low volatility and rising asset prices continue to blow into the fall is up for debate. Here are some things that are on our radar screens as we look ahead.
The Fed: Who, What and When?
Markets this year have cared more about Ben Bernanke’s lexical propensities than about fundamentals. Right now there are three unknowns with which investors have to contend: Who is going to be leading the Fed after Bernanke retires in January, what is the plan for winding down the QE stimulus programs, and when – over what time period – will that plan be enacted? That’s a lot to digest. Of the two top candidates for the job, current Fed Board of Governors vice chairwoman Janet Yellen is seen as fairly close to Bernanke in outlook and temperament, while former Treasury Secretary Larry Summers has at times been critical of the effectiveness of monetary stimulus. The winding up of QE will require a deft balancing of prudent policy and market expectations.
Fundamentals in Focus
The uncertainty around Fed policy is shifting investor focus back to those fundamentals. We’re about 80% of the way through the second quarter earnings season and the results have been decidedly mixed. Apple gave a nice boost to the market when it made its numbers, but elsewhere in Big Tech the story has been disappointing. Median earnings per share growth for the companies that make up the S&P 500 technology sector came in at -8.1% for the quarter, versus analyst consensus expectations of -1.1%. In fact the only sectors to beat EPS growth expectations for the quarter so far are financials, healthcare and utilities. The economic recovery continues to show strength, but many companies are finding the sales and earnings growth climate to be challenging.
DC Dysfunction…It’s Ba-ack
It seems like ages since we watched clueless policymakers wrangle over the fiscal cliff, but unfortunately we are likely to be treated to more reckless brinksmanship this fall when that dreaded debt ceiling comes up again. The opening salvos are not promising, and if anything the political landscape appears even less conciliatory now than it was in the immediate aftermath of Obama’s re-election. If there’s one thing that could spark another spike in the VIX and a reversal of fortunes for equities it’s probably going to come from Washington.
With the S&P 500 up more than 20% for the year to date and earnings misses so far failing to make much of a dent in sentiment we continue to see strength in most areas of US equities and some potential for relative gains from certain non-US sectors. But we remain cognizant of the potential bumps in the road.