Weekly commentary overview

  • Over the past four weeks, stocks have staged an impressive rebound from their February lows. The equity rebound of the past month is a classic “relief rally,” where investors are relieved conditions are not as bad as they previously feared.
  • This one has been partly predicated on hopes that China is stabilizing, which helps explain the sharp rise in commodity prices given that China is the biggest commodities consumer.
  • Unfortunately, signs of real improvement in China are scant. While the U.S. appears to be stabilizing, the Chinese economy remains challenged.
  • Given the still uneven pace of global growth and tighter financial market conditions, volatility may too be low. This, in turn, suggests the potential for a rise in volatility — which would imply another bout of stocks selling off.

Rally marks its fourth week

Stocks continued to climb, rising again for the fourth consecutive week. The Dow Jones Industrial Average added 1.21% to end the week at 17,213, while the S&P 500 Index grew 1.15% to 2,022 and the Nasdaq Composite Index advanced a more modest 0.65% to 4,748. Meanwhile, the yield on the benchmark 10-year U.S. Treasury rose from 1.88% to 1.98% as its price dropped.

Over the past four weeks, stocks have staged an impressive rebound from their February lows. But too much of a good thing can sometimes come with a downside. And so it is with this recent rally, which has pushed volatility back down, but perhaps too low. That means the stage could be set for a return of volatility and another selloff.

A mixed reaction to the ECB

Stocks rallied again last week as investors digested an extensive expansion of the European Central Bank’s (ECB’s) stimulus program, which included an impressive array of old and new tools. The ECB cut its deposit rate by 10 basis points (0.10%) and lowered other policy rates by five basis points. The package also included an increase in the pace of quantitative easing — to the tune of an additional 20 billion euro per month. To accommodate the larger monthly bond buying, the ECB added corporate non-bank investment-grade debt to the list of assets it may purchase. Finally, the ECB expanded a number of lending programs aimed at spurring further credit growth in the euro area.

The initial reaction on Thursday was mixed. Stocks ended the session lower following comments from ECB President Mario Draghi suggesting that further rate cuts were unlikely, but did manage to stage a strong rally on Friday. That notwithstanding, one of the not unwelcome side effects of the ECB program would be a weaker euro to make European exports more competitive. Yet, despite the size and extent of the package, the euro remained higher against the dollar.

Last week’s equity gains were accompanied by some lessening in investors’ appetite for so-called “safe havens,” particularly U.S. Treasuries. Bonds sold off and rates continued to rise, with the yield on the 10-year Treasury pushing back to 2%. Short-term yields are also rising as investors recalibrate the odds of another Federal Reserve (Fed) rate hike later this year. Futures markets are now suggesting a greater than 70% chance the Fed will hike by year’s end. The yield on the two-year note is up roughly 35 basis points over the past month.

Over the past four weeks, stocks have staged an impressive rebound from their February lows. But too much of a good thing can sometimes come with a downside.

Relief rally: Too much too soon?

The equity rebound of the past month is a classic “relief rally,” where investors are relieved conditions are not as bad as they previously feared. This one has been partly predicated on hopes that China is stabilizing, which helps explain the sharp rise in commodity prices given that China is the biggest commodities consumer.

Unfortunately, signs of real improvement in China are scant. While the U.S. appears to be stabilizing, the Chinese economy remains challenged. The latest evidence came in the form of a 25% plunge in Chinese exports. This was the largest single-month drop since 2009. The government is likely to try to stem the decline with some palliative measures, but a large stimulus package remains unlikely. Furthermore, the drop in Chinese exports calls into question not just the state of the Chinese economy, but the global trade picture as well.

Against this backdrop of continued uncertainty in the global economy, the recent rally is beginning to look a bit excessive. This is particularly evident in the sharp drop in volatility. The VIX Index, a key measure of equity market volatility, has fallen to about half of its February peak. Meanwhile, the VVIX, which measures the volatility of volatility (or, more precisely, how frequently volatility spikes occur), is back to its lowest level since last August.

Given the still uneven pace of global growth and tighter financial market conditions, this may too be low. This, in turn, suggests the potential for a rise in volatility — which would imply another bout of stocks selling off. March may have come in like a lamb, but the lion may be lurking.

Where can investors shelter from equity market volatility?

Market volatility may have abated for now, but that shouldn't mean shunning tools that can help you manage it. Russ Koesterich explains a handful of ways investors can look to look to minimize gyrations within their portfolios.

This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 5, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

 

In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. Issued in Australia and New Zealand by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL) for the exclusive use of the recipient who warrants by receipt of this material that they are a wholesale client and not a retail client as those terms are defined under the Australian Corporations Act 2001 (Cth) and the New Zealand Financial Advisers Act 2008 respectively. This material contains general information only and does not constitute financial product advice. This material has been prepared without taking into account any person’s objectives, financial situation or needs. Before making any investment decision based on this material, a person should assess whether the information is appropriate having regard to the person’s objectives, financial situation and needs and consult their financial, tax, legal, accounting or other professional advisor about the information contained in this material. This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. BIMAL is the issuer of financial products and acts as an investment manager in Australia. BIMAL does not offer financial products to persons in New Zealand who are retail investors (as that term is defined in the Financial Markets Conduct Act 2013 (FMCA)). This material does not constitute or relate to such an offer. To the extent that this material does constitute or relate to such an offer of financial products, the offer is only made to, and capable of acceptance by, persons in New Zealand who are wholesale investors (as that term is defined in the FMCA). BIMAL is a part of the global BlackRock Group which comprises of financial product issuers and investment managers around the world. This material has not been prepared specifically for Australian or New Zealand investors. It may contain references to dollar amounts which are not Australian or New Zealand dollars and may contain financial information which is not prepared in accordance with Australian or New Zealand law or practices. BIMAL, its officers, employees and agents believe that the information in this material and the sources on which the information is based (which may be sourced from third parties) are correct as at the date specified in this material. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for this information is accepted by BIMAL, its officers, employees or agents. Except where contrary to law, BIMAL excludes all liability for this information. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of principal. No guarantee as to the capital value of investments nor future returns is made by BIMAL or any company in the BlackRock Group. This information can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited - Dubai Branch, which is regulated by the Dubai Financial Services Authority (“DFSA”), and is only directed at ‘Professional Clients’ and no other person should rely upon the information contained within it. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) for use only with institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. This material is for distribution to “Professional Investors” (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that ordinance) and should not be relied upon by any other persons or redistributed to retail clients in Hong Kong. In Korea, this material is for Professional Investors only (or “professional clients”, as such term may apply in local jurisdictions). Investments involve risks. Past performance is not a guide to future performance. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, The Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association) for Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act) and for information or educational purposes only, and does not constitute investment advice or an offer or solicitation to purchase or sells in any securities or any investment strategies. In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28/F, No. 95, Tun Hwa South Road, Section 2, Taipei 106, Taiwan. Tel: (02)23261600. In Canada, this material is intended for permitted clients only. In Latin America and Iberia, this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

 

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

©2016 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are registered and unregistered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA

Not FDIC Insured | May Lose Value | No Bank Guarantee

BRB-0053