“Whiplash,” “bipolar,” “roller coaster” — those are some of the terms being splashed across headlines and research reports this morning after equity markets yesterday surrendered all of the gains of Wednesday and then some. With five out of the seven prior trading sessions resulting in swings of greater than 1 percent for the S&P 500, investors appear increasingly unsure of their footing as the CBOE Volatility Index continues to creep higher, albeit still well below post recession peaks.
Concerns mount over the BOJ’s stimulus efforts. The minutes from the Bank of Japan’s (BOJ) September 4 policy meeting were released today with indications that there is increasing concern on the part of some members of the policy board about the possible negative impact of further stimulus efforts. Separately, International Monetary Fund deputy managing director Naoyuki Shinohara yesterday expressed doubts that the BOJ will reach its inflation goals in 2015 despite continued easing.
European banks are under the microscope. The European Central Bank (ECB) has declared that it will announce the results of a yearlong review of bank balance sheets on October 26. This long-awaited analysis of the strength of the European Union’s largest lenders coincides with the ECB’s ascendency to the role of regulator for financial institutions in the region.
Russia tries to prop up its currency. Data released by the Central Bank of Russia revealed over $3 billion in attempted currency intervention this month in an effort to stem the collapse of the ruble due to sanctions from the West. The bank’s efforts have had little impact as the currency is set to conclude a fifth consecutive weekly drop. Some analysts predict that central bank governor Elvira Nabiullina will resume rate increases to help stem the tide.
Hong Kong talks break down. Officials in Hong Kong canceled talks with protest groups scheduled for today, prompting student leaders to call for a resumption of demonstrations in the city’s streets. Pro-democracy campaigners accused government officials of insincerity in having scheduled negotiations in the first place.
Oil prices slide lower. Futures contracts for WTI crude oil traded 2.5 percent lower in sessions yesterday, bringing prices fully 20 percent below their June peak, a technical definition of a bear market. A combination of slowing global growth and a North American supply glut has weighed on price forecasts in recent months.
Ebola is “entrenched.” Yesterday World Health Organization deputy head Bruce Aylward warned a gathering of global health officials at the World Bank headquarters in Washington D.C. that the Ebola outbreak in Western Africa is gaining momentum. According to Aylward the deadly disease is now firmly entrenched in the capital cities of Guinea, Liberia and Sierra Leone.
Earnings unlikely to move markets. Today will be relatively light in terms of new earnings announcements, with Safeway, Fastenal and Infosys among the companies scheduled to release third quarter earnings.
Portfolio Perspective: Sell First, Ask Questions Later — Matthew Andrews, Private Capital Advisors
Yesterday’s stock market selloff was all about the moment. U.S. equity investors are reacting to short-term fears created by stalling global growth, a tapering of Federal Reserve quantitative easing and geopolitical concerns that range from military conflicts to an epidemic. Adding to the mix, many variables that could provide a clearer view into the strength of the domestic economy are in flux despite positive overall signals. As a result we are now living in a “sell first, ask questions later” market environment.
The sum of these fears has landed on a market that has seen margin borrowing increase steadily, as major indexes broke new highs on a winning streak that was interrupted only a month ago. With the fourth quarter now upon us, the leveraged portfolio manager is inclined to simply sell and take profits into year-end at the first sign of panic.
From our perspective the potential for macro headwinds to derail growth is real, but perhaps overblown by many commentators. Central banks globally have demonstrated resolve to cushion the private sector from shocks and to try to stimulate increased activity. When more companies begin reporting earnings it is likely that many of those that have panicked in recent weeks will decide that it makes sense to buy stocks again.
We currently see value in some portions of the U.S. health care sector, some technology companies and, as a possibly contrarian play, in many energy sector equities that are being punished by declining commodity prices. The critical factor is identifying the potential for growth in earnings not only in the coming quarter, but also in the coming years and decades, in order to identify valuations that make sense regardless of near-term volatility.
Matthew Andrews is the chief investment officer for Private Capital Advisors, a New York–headquartered asset manager.
