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Equity Market Volatility

The past few weeks have seen a dramatic increase in equity market volatility that has pushed the Chicago Board Options Exchange Volatility Index to the highest levels seen in over two years

S&P Capital IQ - Global Markets Intelligence (GMI) Research sees the recent uptick in market volatility as being predominantly related to a significant increase in the degree of perceived uncertainty that investors are suddenly being forced to acknowledge.

As perceived uncertainty rises, it is perfectly understandable that volatility should rise as well. We see increased uncertainty and volatility as being grounded in the following observations:

  • First, the rapid deceleration of European economic activity that was largely unanticipated by investors at the start of the year or even as recently as mid-year 2014, which is at least partially a byproduct of the geopolitical Russia-Ukraine conflict.
  • Then there is the rapid strengthening of the U.S. dollar and the unknown consequences for the U.S. economy due to marginally tighter financial conditions arising from dollar appreciation combined with the conclusion of the Fed’s quantitative easing policy.
  • The prospect of slowing global economic growth could also have investors rethinking what continue to be very optimistic 12-month-forward S&P 500 corporate earnings expectations, since nearly half of S&P 500 corporate revenue is estimated to come from non-U.S. sources.
  • Over the past few years investors have also become quite accustomed to highly subdued market volatility, which likely induced a good deal of complacency when it comes to risks, such as short-term capital losses, which are traditionally associated with the stock market.

Having said all this, GMI Research remains bullish on the U.S. economy and the outlook for the equity market in the coming year. The U.S. economy continues to show signs of steady improvement and U.S. corporations are currently experiencing a revival of top line revenue growth, providing a foundation for what are expected to be healthier, potentially double-digit S&P 500 earnings growth in 2015, according to the S&P Capital IQ consensus.

 

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