After a 2-year hiatus, volatility has returned to the capital markets. The CBOE Volatility Index (VIX) has been measuring S&P 500 market volatility since 1990 – the last 16 months have seen S&P 500 appreciation of over 35% with the VIX sitting at all-time lows.
On average, the S&P 500 experiences a pullback of at least 5% three times a year, we have not had one since late 2016. We view volatility as a normal and healthy element of a rising equity market. Our job is to assess whether this is a normal correction or indication of something worse. For that we go to the fundamentals to understand what is going on below the surface:
- We have a strong global economy that has been accelerating
- CEO and consumer confidence are at all-time highs
- Credit markets are calm – credit spreads have been reliable indicators of major market downturns over the last 60 years
- Tax reform has improved the cash flow profile of most US companies
- 2018 EPS growth forecasts for S&P 500 companies has risen from 12% to 18% since February 2017
We do not see any fundamental indicators telling us to exit the market. We are still constructive on the outlook for equities and believe that global economics provide a firm foundation for growth.
This is an excellent opportunity to measure your own fear index – if you find yourself extremely worried given the 10% pullback we’ve just experienced – we need to re-examine asset allocation.
Please reach out for any reason – we look forward to a long and constructive working relationship, good markets and bad.
Ashfield Capital Partners
The opinions expressed herein are strictly those of Ashfield Capital Partners, LLC (“ACP”) and are subject to change without notice. The information contained herein is for discussion purposes only designed to highlight various market and portfolio information. While ACP believes all the information is from reliable sources, no representation or warranty can be made with respect to its completeness. Any projections, market outlooks or estimates in this presentation are forward-looking statements and are based upon internal analysis and certain assumptions, which reflect the views of the ACP and should not be construed to be indicative of actual events which will occur. As such, the information may change in the future should any of the economic or market conditions ACP used to base its assumptions change. Past performance is not indicative of future results. The information contained in this report is for informational purposes only and should not be deemed investment advice.