Looking to the financial markets it is always a human game. Fear and greed are always present. In these last periods we can note two human sentiments facing each other: on the one hand, increasing optimism, which is an anticipation of future greed: stock markets continue to rise steadily with such low volatility that the market’s fractality has been temporarily replaced by an incredible linearity.
A number of reports have come out over the last few years which put forward the view that investors will have to come to terms with lower returns going forward than they are used to from the past several decades.
Around the time of the S&P 500’s launch in 1957, a remake of the Hollywood musical Anything Goes opened in cinemas across America. The movie featured Cole Porter’s eponymous song, which began with the words “Times have changed”.
A new presidential cycle just begun in the USA and the stock market has welcomed 2017 with a bullish note. The S&P500 rose about 7% in the first two months of the year, the month of March has started in a corrective mood and the market retreated a bit still leaving the progress around 5% year-to-date.
It was a hefty start, that could well lead to a seasonal top. At the moment, we see the recent high of March 1st, near 2’400, above 21’000 for the Dow Jones Industrial, as a strong resistance, but it is interesting to compare the bullish wave of these recent weeks with the recurring cyclical patterns. First, we note that a healthy February is not so common. February is used to be a sluggish month for Wall Street, even worse in the first year of the presidential cycle with an average return, for the 16 occurrences since 1953, of -1.83%. In figure 1 is shown the average historical yearly pattern of the S&P500 since 1952 compared with the average of returns in the first year of the presidential cycle. They are very similar, even if the first of the four years term tends to be a bit more volatile and less performing. Usually, February and August are the worst months followed by June and September.
The first weeks of Mr Trump being in power have been disruptive, the least to say. Concomitantly, reflation trades, which we were early proponents of since Spring last year, may be getting overextended. We believe it may be time to consider Defensive and Growth stocks again.
Allianz Global Investors has brought a volatility-focused absolute return fund to the Swiss market.
After weeks of calm, the Vix index showed Friday night a real surge moving up 5 points from 12.5 to 17.5 points, + 40% in one day stock market, triggering a real bell alarm among international operators.
Soaring Vix was the prelude to the Wall Street meltdown. New York was in fact the first to pay the consequences; specifically the Dow Jones closed at -2.13%, S & P500 lost 2.45% while the Nasdaq closed at -2.54%. A first analysis indicates in the words of Rosengren, who on Friday had accused the Fed going to be laggard in raising interest rates.
