Investment Clock insights

October volatility creating buying opportunities


Trevor Greetham

11 October 2018

We expected volatility to rise in October. Our views haven’t changed since our recent Investment Clock report.
Markets are often choppy this time of year as investors try to judge the strength of the world economy going into the seasonally important part of the year. There are negative cross currents with growth slowing, US rates rising and Trump’s trade war rhetoric hotting up ahead of next month’s Mid Term elections. All of this has triggered a sharp rise in volatility (chart 1) but we expect the economic expansion to continue well into next year and this should ultimately propel stock markets higher. US tax cuts and spending increases are still feeding through, interest rates elsewhere in the world are very low and China is easing policy to offset trade war fears.
We started to buy equities on weakness on Monday as prices dropped. We will probably be adding more exposure over the next few days with our contrarian investor sentiment gauge at its most oversold since April (chart 2). We believe investors should be fearful when others are greedy and greedy when others are fearful. The multi asset funds we manage were pretty much neutral on stocks going into this period with a tilt away from emerging markets and commodities. We have dry powder to buy the dip with.

We expected volatility to rise in October. Our views haven’t changed since our recent Investment Clock report.

Markets are often choppy this time of year as investors try to judge the strength of the world economy going into the seasonally important part of the year. There are negative cross currents with growth slowing, US rates rising and Trump’s trade war rhetoric hotting up ahead of next month’s Mid Term elections. All of this has triggered a sharp rise in volatility (chart 1) but we expect the economic expansion to continue well into next year and this should ultimately propel stock markets higher. US tax cuts and spending increases are still feeding through, interest rates elsewhere in the world are very low and China is easing policy to offset trade war fears.

We started to buy equities on weakness on Monday as prices dropped. We will probably be adding more exposure over the next few days with our contrarian investor sentiment gauge at its most oversold since April (chart 2). We believe investors should be fearful when others are greedy and greedy when others are fearful. The multi asset funds we manage were pretty much neutral on stocks going into this period with a tilt away from emerging markets and commodities. We have dry powder to buy the dip with.

Chart 1: Seasonality of stock market volatitlity (VIX)

Source: RLAM, Bloomberg. Chicago Board Options Exchange (CBOE); Average calendar year profile of VIX implied volatility for the S&P 500 index from January 1990 to October 2018 

Chart 2: RLAM Investor Sentiment Indicator with Stock Prices

Source: Thomson Reuters Datastream as at 05/10/2018 

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.

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