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Volatility replaces complacency in first quarter
During the first quarter of 2018, the S&P 500 posted its first quarterly decline since 2015. The equity declines extended to Europe and Asia, with the FTSE 100 shedding 8% and the Nikkei 225 closing the quarter down 5.75%.
Bonds markets faced difficulties of their own. The yield on the 10-year treasury bond posted the biggest quarterly jump since 2016, and the spread between the 2-year and 10-year yield narrowed to a ten-and-a-half year low.
William Hobbs, head of investment strategy at Barclays Investment Solutions, says ‘short-term US interest rates have risen higher than their longer-term equivalent before every US recession since 1950, with a lead time of around one to one-and-a-half years.’
But Hobbs takes the fact that the yield curve is yet to invert as an encouraging indication. He says a flattening yield curve is insignificant in terms of its ability to predict a recession and it is only an actual inversion that has true substance.
What’s in store for the second quarter?
The second quarter of 2018 started where the first quarter left off, with volatility high amid fears of an escalating trade war between the US and China, as well as fears over technology stocks. US equity markets had the worst single-session start to April since the Great Depression.
The analyst team at Charles Schwab thinks we should be welcoming the volatility, describing the market as a ‘bunny market’, because it hops up and down.
Barclays’ Hobbs says higher volatility is something we must just come to accept.
Time to jettison tech?
65% of the US tech sector, including Google’s parent company Alphabet, is currently trading in correction territory, according to Market Watch. That means the stocks are trading 10% or more below their 52-week highs. Facebook is in bear market territory, meaning it is 20% or more below its 52-week high.
The question is whether the sell-off represents a good chance to buy into weakness or whether there’s more pain ahead for the tech sector. Hobbs says he is not too concerned about the outlook for the tech sector because he believes there is an underlying strong demand story, citing strong Korean trade statistics produced over the weekend, with semiconductor shipments hitting all-time highs. He says this is a good lead indicator for wider tech demand.