The S&P 500 (SPX) suffered its biggest loss in two months on Friday as March roared in like a lion. When the final bell clanged, the index had erased 30 points, or 1.6%.
The main driver behind Friday’s stock crumble was actually “good” news. A stronger-than-expected reading for February job growth triggered a fresh case of interest rate nerves. The report prompted speculation that the Federal Reserve could start to tighten the monetary policy screws as early as its June meeting and maybe launch a steady string of rate hikes from there. Remember, it’s been overly easy Fed interest rate policy that’s helped to fuel this bull market. What’s more, the buzz I hear from long-time fixed income traders centers on hidden inflationary pressures, with one guy finding contradiction in labor numbers. The unemployment rate at a relatively low 5.5% comes with the lowest job market participation rate in 37 years. Something’s gotta give.
What a difference from a February characterized by mild daily market moves and a sharp drop in volatility. What’s more, market rumblings come as history is made. It was this day—March 9—back in 2009 that the SPX bottomed at 676.53. In six years, it’s rallied more than 200%.
The jobs report didn’t just jolt the equities market, but also seemed to stir significant movement across a number of asset classes. Gold lost nearly $30 an ounce, oil dropped $1.15 a barrel, bond yields rallied to 2015 highs, and the euro fell to its lowest levels against the dollar in over a decade, coming within a whisker of parity.
The CBOE Volatility Index (VIX), which dropped to less than 13 earlier in the week, closed north of 15 on Friday (figure 1).
One reason that VIX dropped to the mid-teens from January’s low 20s is that many of the macro worries that roiled the equities market in early 2015 seemed to have receded: oil prices, although still at multi-year lows, stabilized; Europe and Japan outlined accommodative measures to help the global economy; a revamped Greek debt bailout deal was in the works.
Synchronized Stock Market?
With these global factors at work, investor sentiment became less bearish last month, and as the S&P 500 churned to new highs, implied correlations fell. The CBOE S&P 500 Implied Correlation Index (ICJ) tracks the degree of co-movement among SPX components. A rising ICJ indicates greater correlations, with sectors moving higher or lower in lockstep. ICJ’s biggest spikes tend to come during periods of market turmoil when stocks are moving broadly lower due to macro concerns; in fact, it hit 52-week highs last October.
Figure 2 shows that the correlation index was somewhat elevated in early February when it hit 63.26 but fell sharply in the weeks that followed. Last Thursday, ICJ touched 51.67, its lowest levels since 2012. But look what happened on Friday: the index put up a notable one-day move to 54.81. If the trend continues, it could signal that macro market movers are overshadowing case-by-case company news like earnings, stock buybacks, product rollouts, and so on.
Events overseas, changes in bond yields, and energy prices are all factors that could affect correlations and volatility this week as well.
Fed-watching could also hold sway. This week, Fed-favorite JOLTS data is issued on Tuesday. It gives an idea of the churn in the labor market. But essentially, the economic calendar (see figure 3) is back-loaded with retail sales and jobless claims stats due Thursday. The producer price index (PPI) will set the tone for trading Friday and might have more influence than usual given the implications for inflation and interest rates.
We’ll get a sense of the mindset of select retail investors with the latest TD Ameritrade Investor Movement Index® (IMX), out Monday. Refresher: IMX tracks holdings/positions, trading activity, and other data from a sample of our 6 million funded client accounts. Net buyers? Net sellers? Let’s see.
Now, macro factors may rule, but that doesn’t mean a complete absence of potential company headlines. Apple (AAPL) holds a conference today that’s expected to feature the much-anticipated Apple Watch. There will be some apps to start, which could launch with all the excitement fans have come to expect. Apple stole Friday’s headlines with the announcement it will bump AT&T (T) out of the Dow Jones Industrial Average. This makes sense on many levels and should make the DJIA more meaningful to the retail trader. After all, AAPL was the No. 1 held and No. 1 traded stock across TD Ameritrade platforms last year.
Finally this week, a handful of retailers, including Ann Taylor parent Ann Inc. (ANN), Dollar General (DG), and Aéropostale (ARO), are on the earnings agenda. Dow component and oil giant Chevron (CVX) holds an analyst meeting Tuesday.