EquityFeb 21 2017

Equity market volatility overdue after smooth start to 2017

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Equity market volatility overdue after smooth start to 2017

Investors should brace for volatility in the stockmarkets, despite the “smooth start to 2017” for equity markets, according to Goldman Sachs Asset Management.

The firm has pointed out during the first seven weeks of 2017, equity investors in the S&P 500 index have not suffered a single daily loss of at least 1 per cent (see chart). 

GSAM commented: “While most of the year still lies ahead, even by this point in the year the market has historically already declined an average of five times.”

Figure 1: Trading days during the year with a decline of at least 1 per cent.

 

 

Source: Bloomberg and GSAM

Wall Street’s flagship S&P 500 index ended last week (17 February) at 2,351.16, up 0.2 per cent.

The FTSE 100, the UK’s flagship equity index, has been on a similar upward trajectory so far in 2017, while the FTSE All Share index also hit a record high last week.

“We appreciate the market’s smooth start to 2017, but would not be surprised to feel bumps occurring with greater frequency before the year is through,” the asset manager said.

Darius McDermott, managing director at Chelsea Financial Services, pointed out the biggest fall suffered by the FTSE 100 this year was between 27 January and 30 January when it was down 66 pts, which is less than 1 per cent.

He said: “Volatility is a bi-product of what markets do, not the other way around, so as markets have gently been trending upwards this year it's no surprise volatility is down. 

“I find it all a bit odd though. Equity markets are certainly no longer cheap and it's hard to see earnings doing as well as they need to to support the fundamentals.”

As for whether it would be a significant macro or political event that could derail equity markets this year, Mr McDermott explained many upcoming political events are already priced in.

“Given markets only reacted for a day or so post-Brexit, post-Trump and post Italian referendum, I'd suggest that the big political unknowns are known unknowns and it is more likely that something small that we've not yet thought of actually triggers a correction if it comes,” he said.

eleanor.duncan@ft.com