Global markets to remain volatile on macro data, trade war fears

New York: Stocks around the world jumped on Friday to cap another tumultuous week, but expectations are modest on the upward trajectory of global stocks.

Stocks, bonds and other investments heaved up and down throughout the week, with worries hitting a crescendo on Wednesday when a fairly reliable warning signal of recession flipped on in the US Treasury market.

Friday marked the seventh time in the last 10 days that the S&P 500 swung by at least 1 per cent, something that hasn’t happened since the end of 2018, the last time investors were getting worried about a possible recession. At that time, they were concerned about rising interest rates, along with the trade war.

Don’t expect the volatility to go away anytime soon, analysts say. No one knows when Trump’s trade war will find a resolution, nor whether all the uncertainty it’s created will push enough businesses and shoppers to hold off on spending and cause a recession. Some investors are digging in for trade tensions to last through the 2020 election.

“We’re also heading into a tough season for the market,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “September and October tend to be the most volatile of the year for markets. We’ve been talking to investors for that reason to look for areas to prune risk within a portfolio.”

The S&P 500 has lost an average of 1.1 per cent in September over the last 20 years, making it the worst-performing month of the year. October’s track record is better, but it includes the worst monthly performance in that stretch, a nearly 17 per cent drop in 2008.

But Roland and other professional investors also caution that this kind of turmoil is actually normal for the market, when looking at it from a very long-term point of view. The US stock market historically has had such bursts of tightly packed volatile days, interspersed between longer periods of calm. Since early 2009, whenever the S&P 500 has had a drop of 3 per cent in a day, it either preceded or followed another such drop within a month 70 per cent of the time.

“What’s been abnormal is the super-low volatility” that investors have been enjoying for much of this bull market, which began in 2009, said Brian Yacktman, portfolio manager of the YCG Enhanced fund.

He sees the volatility as an opportunity to buy stocks at cheaper prices, and he’s recently been partial to bank stocks, which have been hammered on worries that lower interest rates will hurt their profits.

“When you have volatility like this, you’re actually buying the market on sale,” said Rob Scheinerman, CEO of AIG Retirement Services. “That’s a great thing.”

Investors favoured smaller company stocks, which pushed up the Russell 2000. The index rose 31.99 points, or 2.2 per cent, to 1,493.64.

Even with the latest bout of turbulent trading, the S&P 500 is still having a good year. The broad market index is up 15.2 per cent for 2019. Similarly, the Nasdaq is still up 19 per cent for the year.

Long-term bond yields also climbed Friday. The yield on 10-year Treasury rose to 1.56 per cent from 1.52 per cent late Thursday.

The bounce for yields followed a weeklong slide that included a sharp drop on Wednesday that rang yet another alarm bell for the economy. The 10-year Treasury yield dropped below the yield on the two-year Treasury, a rare occurrence and one that has historically suggested a recession may be a year or two away.

Low rates impact

Investors are hoping that the Federal Reserve will continue to cut interest rates in order to shore up economic growth. The central bank lowered interest rates by a quarter-point at its last meeting. It was the first time it lowered rates in a decade.

Lower US interest rates could help support outperforming US home builder stocks, even as they raise worries about the economy, while a bonanza of industry data and Federal Reserve speakers next week are likely to help shape the outlook.

After underperforming in 2018, the PHLX Housing Index is up about 30 per cent for the year so far, roughly double the year-to-date gain of the benchmark S&P 500 index.

Mortgage rates have been declining with US Treasury debt yields, and the outlook for interest rates suggests further easing after the Federal Reserve lowered rates last month and indicated it could ease again this year, depending on data.

This week, US 30-year Treasury yields fell to a record low below 2 per cent while benchmark 10-year yields declined to a three-year trough as trade tensions linger and global economic growth continues to slow.

The 30-year fixed mortgage rate has dropped to 3.60 per cent from a peak of 4.94 per cent in November, according to data from mortgage finance agency Freddie Mac. Mortgage rates are often tied to the benchmark 10-year Treasury yield.

Strategists said that could bode well for home builders and the housing market, which has been struggling because of land and labour shortages.

A report on Friday showed US homebuilding fell for a third straight month in July amid a steep decline in the construction of multifamily housing units, even as the data provided a positive sign for housing: a jump in permits to a seven-month high.