Investors Tune Out “Noise” Focus on Economic Growth

Investors Tune Out “Noise” Focus on Economic Growth

Investors Tune Out “Noise” Focus on Economic Growth


So far during The Trump Era, the global markets are showing a low level of volatility, that despite the chaos and uncertainty that analysts warned his Presidential win would bring.

Notably, the global economy’s growth is at its most steady and predictable for decades, since recovering from the Y 2008 financial crisis, and that is Trumping any short-term political issue.

The economic recovery and consequent stability has not been built on a borrowing binge, suggesting the low volatility climate can continue, even if there are more political shocks in store, from the outcomes of the Dutch, French or German elections this year.

As a result, investors feel encouraged to continue seeking out riskier assets that offer relatively high returns, thereby supporting The Trump Rally that has extended the Bull Market in stocks and bonds that began on 9 March 2009.

The recovery has been built on steps taken by policymakers since the crash, not least the trillions of dollars of central bank stimulus and the rebuilding of the banking system.

“This is a very stable world economy. It’s never been so stable, and this is why the market is so stable and risk premia so low,” said the  head of global asset allocation at JP Morgan.

“Markets reflect fundamentals, and if the fundamentals are stable, asset prices will become less volatile,” he said.

Based on a 5-year rolling standard deviation of quarterly global real GDP growth rates, global macro volatility is at around 0.5%, says JP Morgan. That’s the lowest level in 40 years or more.

Over the last 5 years, annual private sector credit growth, excluding financial institutions, has been around 6-8% globally, according to JP Morgan. In the 5 years up to Y 2008, it had virtually 2X’d to around 13%.

This lack of ‘leverage’, thanks to governments’ and banks’ post-crisis caution in over-extending themselves, suggests the “Goldilocks” backdrop of low volatility and rising asset prices can continue.

The VIX index is a measure of implied volatility in US stock markets, and it is around 12%, and has rarely been lower in its 26-year history.

Ultra-low volatility and a fairly predictable world economy runs counter to the narrative that US President Donald Trump’s policies on Key issues such as immigration and world trade, would send markets into spin.

That has not occurred, although the media “noise” on President Trump’s potentially negative impact on world markets not slowed either.

HeffX-LTN’s research shows that stock market volatility around the world is below the 10-year median. It is especially low in France, Britain and the United States, where it is more than 50% below the median. See the VXX analysis below.

This is largely down to the accomodative monetary policy central banks have implemented since the Y 2008 financial crisis, which has boosted all assets and capped volatility everywhere.

Volatility tends to fall in a rising market and vice versa.

The DJIA has risen more than 250% from the 9 March 2009 low, posting continuous record highs in recent weeks and is now in consolation mode.

So, the stable fundamental’s have helped cap financial market volatility. Global company earnings volatility has been low throughout the post-crisis recovery; consistently 5% or lower over the past 5 years.

In the past 20 years the data shows that there have been only 2 significant rounds of earnings volatility of 15% and higher, or global recessions. They coincided with the market crashes of Y’s 2000-02 and 2007-09. We are not seeing that here.

Tuesday, the major US stock market indexes finished at: DJIA -44.11 at 20837.37, NAS Comp -18.97 at 5856.82, S&P 500-8.02 at 2365.43

Volume: Trade on the NYSE was below average with 867.1-M/shares exchanged.

  • NAS Comp +8.8% YTD
  • S&P 500 +5.7% YTD
  • DJIA +5.4% YTD
  • Russell 2000 +0.4% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.35) Bullish (0.31) Neutral (0.23) Very Bullish (0.50)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.29) Neutral (0.11) Bullish (0.31) Bullish (0.46)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Very Bullish (0.50) Very Bullish (0.51) Very Bullish (0.56) Bullish (0.42)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.40) Bearish (-0.38) Bearish (-0.46) Bearish (-0.38)

Stay tuned…

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