Week of March 28, 2016
Global markets were mixed last week. The US had a short trading week and all indices were off less than 1%, snapping a five-week positive streak.
The Dow Jones Industrial Average was down 0.49% and the S&P 500 and NASDAQ Composite were both down 0.66% and 0.46%, respectively. Asian markets were up with Japan's Nikkei 225 Index notching a 1.66% return and China' Shanghai Composite was up 0.82%. European markets, however, posted a negative 3.03% return as measured by the MSCI Europe Index.
We would all probably agree that the stock market has been volatile this year and regular readers of these commentaries are likely familiar with many of the driving forces. However, we haven't seen anyone attempt to quantify just how volatile the first few months of 2016 really were so we set about by looking at the S&P 500 Index and measuring the number of days the index moved greater than 1% and 2%, plus or minus. We would point out that 2016's data is only through March 22nd and recognize history is not a great predictor of the future; however, it is still an interesting exercise to compare and contrast the data. As Figure 1 below indicates, for daily moves greater than 1%, we have actually come off a four-year period of less-than-average volatility. The average for days with larger than 1% moves is 29%, or, put another way, the S&P 500 experiences a day that moves more than 1% up or down nearly a third of the time. For Figure 2, we took the same data but only showed moves greater than 2% up or down for the S&P 500. If we assume volatility will continue at the same pace for 2016, keeping in mind that history is not a predictor of the future, 2016 is actually on par to match 2008 and its 1% and 2% moves. More broadly, it is also interesting to note that both charts show periods of higher-than-average volatility are followed by lower-than-average volatility.
Source: Morningstar Direct
Source: Morningstar Direct
The PMI, or formally the Purchasing Manager's Index, is an economic measure that looks at inventories to gauge how businesses are preparing for the future. A reading over 50 indicates that managers are expecting growth and stockpiling inventories in preparation while a measure under 50 means inventories are reduced in anticipation of a slowing economy. Investors were waiting with bated breath for Japan's PMI last week and, unfortunately, it contracted slightly from 50.1 in February to 49.1 in March. The drop was largely due to a reduction in Japanese exports. The sub-index measuring export activity fell from 49 to 45.9, marking the fifth straight decline. The country appears to be facing tough headwinds as the Asian regional economy is impacted by lukewarm global growth and a slowing China, more specifically. The Bank of Japan has taken a more aggressive approach over the last 18 months in its attempt to drive economic growth through large quantitative easing programs and a negative interest rate policy that was announced earlier this year. While the Bank of Japan's quantitative easing policies can be traced back to the 1990's, GDP growth, however, has remained a tepid 1% since then. Investors are hoping this time will be different but the economy may be facing an uphill battle as central bank policies appear to be losing their effectiveness and slowing economic activity in the Asian region continues to impact Japan.
IMF and the Chinese Yuan
The International Monetary Fund, or IMF, is pressing China to release data on how it props up the yuan as the country has increasingly turned to derivatives to influence its currency. As we have mentioned in past commentaries, China has been expending vast reserves to counteract the downward pressure on the yuan as investors continue to pull assets out of the Chinese markets. As the graphic below shows, China's foreign-exchange reserves have fallen nearly 25% from their most recent peak in 2014, driving the People's Bank of China to employ derivatives, rather than reserves, to influence its currency. While derivatives can help manage the fall in the yuan, the IMF and investors alike are pushing China to release the true extent of its currency intervention as the use of derivatives masks the true amount of capital the central bank is expending. This lack of clarity surrounding China's policies feeds market uncertainty and this drives more market volatility. One of the primary drivers of the IMF's inquiry is that the Chinese yuan was added to the basket of reserve currencies last November, making it one of the few currencies the IMF uses to issue emergency loans to struggling economies. So far, China has reported some of its derivatives holdings but they have not released all of them. The euro, US dollar and the Japanese yen are the others currently listed as reserve currencies.
Fun Story of the Week
As humans continue to push the boundaries of exploration, outer space remains one of the last and greatest frontiers. But space is a fraught with danger and we know very little about the long-term impact of zero gravity on the body. This is why NASA set forth with an ambitious plan to keep an astronaut aboard the International Space Station (ISS) for nearly a year to study the impacts on the human body in preparation for longer-term missions. Scott Kelly, the astronaut who spent a staggering 340 days aboard the ISS, just came back to Earth and did so 1.5 inches taller than when he left. That's because space lacks the gravity that compresses our spine back on Earth. However, the spine isn't the only part of the human body that is impacted. Indeed, the zero-gravity atmosphere runs roughshod over muscles, organs and bone density. To counter the effect of weightlessness on bones and muscles, astronauts exercise frequently but bone density still deteriorates at nearly twice that of an adult back on Earth. The zero-gravity also affects fluids in the brain as the lack gravity allows fluids to shift, changing the shape of eyes and leading to vision impairment or even loss of sight. Interestingly, NASA has found that our immune systems tend to perform poorly when in space but they don't know why. This is why Kelly's long stay aboard the ISS is so important for the future of mankind in space; hopefully paving the way for longer-term manned missions to the moon or even Mars.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
DJIA - The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ COMPOSITE - The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX - The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX - The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
SHANGHAI COMPOSITE INDEX - The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
MSCI EUROPE INDEX - The MSCI Europe Index is a market capitalization weighted index which consists of stocks from 15 developed market countries within the European region.
Wall Street Journal, March 2016, http://www.wsj.com/articles/imf-pressing-china-to-disclose-more-data-on-currency-operations-1458563063
Reuters, March 2016, http://www.reuters.com/article/us-japan-economy-pmi-idUSKCN0WO064