Uncertain outlook: People walk outside the New York Stock Exchange. Wall Street’s most closely-watched measure of investor nervousness, the Cboe Volatility Index, last Friday hit its highest in nearly seven months. — Bloomberg
NEW YORK: Growing volatility in US stocks is driving a search for defensive assets, though investors may have fewer places to hide this time around.
Wall Street’s most closely-watched measure of investor nervousness, the Cboe Volatility Index, last Friday hit its highest in nearly seven months, as the S&P 500 slid for the week.
The benchmark stock index is down 8% from late July, when it hit its high for the year, though still up 10% year-to-date.
Assets that can help investors weather the storm may be in short supply.
Equity sectors such as utilities and consumer staples, popular with nervous investors when markets grow choppy, have been swept up in the S&P 500’s recent decline.
The Japanese yen stands at its lowest against the dollar in about a year.
US government bonds are on track for an unprecedented third straight annual loss, with yields on the benchmark 10-year Treasury – which move inversely to bond prices – at their highest since 2007.
That has left investors piling into other traditional safe-haven assets such as the dollar and gold, as well as short-term debt.
Nevertheless, “it is no doubt a challenging environment for well-diversified portfolios,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
Of Treasuries, he said, “We have this safe-haven asset class that is not necessarily at the moment getting any bid or providing much safety from that volatility of the headlines.”
Investors have plenty of reasons to be jumpy. Rising bond yields have dampened risk appetite, raising the cost of capital for companies and offering investment competition to stocks.
Federal Reserve chairman Jerome Powell last Thursday said the stronger-than-expected US economy might warrant tighter policy.
Fears that the conflict in the Middle East will widen have made traders more anxious, while a weaker-than-expected earnings report for Tesla this week also darkened the mood.
Volatility in stocks has been accompanied by increased gyrations in the Treasury market. The MOVE index, which measures expected volatility in US Treasuries, stands near a four-month high.
“When rates are increasing at the rate they are and the geopolitical situation is what it is, now you are getting a bid to volatility,” said Brent Kochuba, founder of options analytics service SpotGamma.
The week ahead will be busy for markets, with earnings due from Microsoft, Alphabet, Amazon and Meta Platforms – four of the seven US mega-cap stocks whose gains have powered the S&P 500 higher this year while the rest of the index has lagged.
The index’s defensive sectors have been battered this year, with utilities down about 18%, consumer staples off nearly 9% and healthcare down roughly 6%, partly because higher yields on Treasuries have dulled their allure.
“Safe-haven assets have not performed as expected in response to conflicting growth data and elevated geopolitical tensions,” analysts at UBS Global Wealth Management wrote last Friday. — Reuters
