Equity sector weightings in 2018

Stock market outlook

It has been quite the two weeks in financial markets – both globally and in North America. Volatility rose sharply. For example, the VIX – a measure of volatility of the S&P 500 –intra-day, touched 50 in the week of February 5th, the first time it had surpassed 30 since the mini-panic that occurred in August 2015 following the surprise mini-devaluation of the Chinese currency. In contrast, through the whole of 2017, this measure of volatility never even surpassed 20. The major result of this volatile activity in markets – including bonds as well as stocks – has been a refocussing by investors on risk.

Where volatility in stock markets and the level of equity indices goes in the short term is hard to predict. However, historically, whenever the VIX has exceeded 40 and then reversed back down below 20 (currently, as at February 15, it is at 20), markets have tended to stabilize and improve after a few days/weeks. Support levels are often used by technical analysts based on previous short term bottoms. In the case of the TSX, the most recent short term bottoms for the TSX were 14,500 in November 2016 and 14,900 in August 2017. We will have to see whether a range between 14,500 and 14,900 holds over the next few days/weeks and creates at least that short term bottom.

Although our recent presentations on our “Outlook 2018” have been emphasizing our view that we are likely in the 8th or 9th inning of this equity bull market cycle which started in March 2009, we suspect that the recent weakness is unlikely to be marking the immediate onset of an equity bear market. Almost invariably, bear markets precede or are coincident with recessions (the October 1987 Crash was an exception) and as we have explained in recent Strategy Notes, the reliable leading indicators that we use (the ECRI Weekly leading Indicators –WLI- and real M1 growth for G7 and major emerging markets) do not suggest, at this stage at least, much likelihood of a U.S. or global recession in 2018.

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