After a touch-and-go start to 2015, the S&P 500 (SPX) banged out a solid 5.4% February gain and is up 2.2% year to date. Now, as the Q4 earnings reporting season wraps up with a few key retail names, investor attention could swing to economic data at home and abroad.
In fact, a couple of market tests are hitting early Monday. China, which logged its slowest growth in decades in 2014, on Saturday cut its benchmark lending and deposit rates. The action prompted a stock rally in Asia and initially in Europe. Also moving the broader global markets, crude oil is down almost 2% as $48 a barrel becomes a key support level.
The typically market-moving monthly employment report caps a packed data week and carries some burden to repeat January’s stronger-than-expected performance. As such, it could test the rosy market sentiment that’s accompanied a new pattern of slower trading and falling volatility. The CBOE Volatility Index (VIX) may gain heading into the jobs report.
Through February, several measures show a drop in volatility in part linked to the breadth of stock-sector gains. Let’s just say you may need sunglasses for the bright green that dominates the TD Ameritrade Trade Architect® Heat Map for last month. Nearly every market sector logged gains last month. The exception was the typically defensive utilities group, which lost more than 6% and is now down 4.2% for 2015. Another sign of dropping risk perceptions showed up in other typically defensive sectors such as health care and consumer staples, which also underperformed. Leadership emerged from technology, materials, and consumer discretionary (figure 1).
Will Slim Daily Moves Continue?
Although most sectors are participating in the recent advance, intraday market moves have become smaller over the past month. The average daily move in the SPX in February was roughly 10 points, a substantial drop from the average 18-point daily moves in January. It’s likely that smaller moves may continue with the broader market at record highs, but a turn of direction could mean something different entirely. It’s been said before, but let’s hear it again: Stock markets take the stairs on the way up and the elevator on the way down.
Average daily moves aren’t the only measure heading south. The big drop in the VIX is another sign that risk perceptions are falling and the SPX is trading in more orderly fashion after its gyrations in January. VIX finished at 2015 lows of 13.34 Friday and shaved 37% from the high of 22.81 hit on the first day of February. Yikes!
VIX, which tracks the implied volatility priced into short-term SPX options, was not alone in trending lower last month. Volatility fell for indexes tracking small-cap stocks, the tech-studded NASDAQ, emerging markets, currencies, and commodities (figure 3).
VIX and other measures of implied volatility capture investor risk perceptions because the numbers are computed using live options prices and options pricing calculators. Therefore, the big moves in February seem to indicate that investors are expecting and “pricing in” the possibility that volatility will remain subdued in the weeks ahead.
What Could Test That Mindset?
Friday’s looming jobs report will hold the market’s attention throughout the week. But in the lead-up to that report, a key measure of consumer confidence could emerge in Tuesday’s motor vehicle sales release (figure 4). Last month, car sales were strong and most analysts pinned that number on improved job growth. Will we see back-to-back robust monthly gains? Auto industry stats show that the average age of cars on U.S. roads is at its highest in a long time. Can anyone say pent-up demand?
Consumer barometers could be tracked in this week’s earnings reports. Even as the pace of earnings reports slows, the few to report carry potential market-moving impetus. That includes retailers like Best Buy (BBY), Abercrombie & Fitch (ANF), and AutoZone (AZO). Dow component and oil giant Exxon Mobil (XOM) hosts an analyst day on Wednesday.
European data could hold sway as well. In a sign of the ongoing economic worries facing the eurozone, its shared currency fell sharply against the U.S. dollar last week, with EUR/USD quoted at 1.119 late in the week and back within striking distance of the decade-low 1.11 seen in mid-January. Renewed euro weakness comes amid anxiety about the unfolding Greek bailout talks and ahead of data on eurozone GDP, manufacturing, and inflation. A European Central Bank meeting scheduled for March 5 could trigger gyrations in the euro and broader markets as well.