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Volatility Is Coming: Here's Where We Are Today

Nov. 02, 2017 9:55 AM ET1 Comment
James Cotter profile picture
James Cotter


  • With global political uncertainty rising and big decisions to come, markets are biding time.
  • Global central bank policies are at a point where tightening will start playing a bigger role and easing will begin to slow.
  • Valuations are playing less of a role in equity markets.

Global risks and uncertainty are rising and consolidation is coming. The GOP tax plan, Catalonia's fight for independence, a new Fed chair and central bank policy decisions are all big factors that will bring volatility into the market in the coming weeks. Many articles and radio shows in the last few months have mentioned a paradigm shift which has taken place - one with a lower focus on valuations and bigger focus on relative growth prospects. This speculation based on relative growth has pushed equity markets to record highs globally.

In the United States, forward P/Es have broken out above the rest of the world, signaling extreme optimism in American equities. That bullishness usually does come in times of expansion such as the current bull market. However, this bull market has some different features.

Source: Yardeni Research, Inc.

Market Breadth

The issue behind this expansion of P/Es beyond global indices has been the breadth of growth in the United States. Breadth has been near all-time lows in large part due to tech stocks. Below is a chart of market breadth comparing the S&P 500 and the SPDR Technology Sector ETF (XLK) in orange. Below is a popular gauge of breadth, the ARMS Index.

Central Bank Policy

In the upcoming weeks, investors are expecting a new Fed chair, balance sheet deleveraging, continued rate decisions, and global central bank policy decisions. As global inflation begins to slowly creep back into the markets, the risks of deleveraging and tightening globally are expected to bring increased risk and volatility into the markets. Inflation creeping back into the markets gives central bankers the rationale to continue tightening and start restricting the flow of credit that could alter companies' capital expenditure plans which will be reflected on the bottom line in the next 8-12 quarters of earnings.

This article was written by

James Cotter profile picture
Undergraduate student providing personal fundamental equity research and tactical macroeconomic trades ideas.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

Totally agreed. SVXY chart shows it is about to roll off while VIX does not even bulge to break the lower than 10 & UVXY has no intention to break its low as well in the face of “record record profits” decade high consumer confidence tax reform bill release etc. On the earning side, FB sold off at excellent profits ETC....seeing it as the end of the bull market at the current stage. A pullback is very likely.
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