volatility not on alert for coming payroll report
http://seekingalpha.com/articles?filters=market-outlook
n a recent mid-year update to our 2011 outlook, we noted how equity market volatility is likely to rise further in light of continued near-term weak economic growth. Here are a few more thoughts on our expectations for rising volatility.
Already, spring’s unusually placid markets have given way to heightened volatility. The most recent cause has been anxiety over Greece, but investors are not at a loss for things to worry about.
This is a sharp departure from just eight weeks ago. In April, the VIX Index — which measures implied volatility on S&P 500 options and is often referred to as the “fear index” — hit its lowest level since early 2007. Investors were demonstrating an almost Panglossian, or blindly optimistic, world view.
After a steady stream of below consensus economic reports, festering sovereign debt issues in Europe and the growing realization that developed economies are running out of both fiscal and monetary bullets, investors are reevaluating their world view.
While we do not subscribe to the notion that the global economy is headed back into a recession, we do think that market volatility is still too low and can move higher.
Given the deceleration in the global economy, chronic debt issues in both Europe and the United States, and the end of the Federal Reserve’s quantitative easing program (QE2) — effectively a tightening of monetary policy — it is hard to justify below-average volatility. We believe volatility should be trading in the 20 to 25 range rather than between 15 and 20.
While the level of volatility we expect is not particularly extreme compared to other historic periods, it does suggest that investors should maintain a more defensive posture in their portfolios. In terms of defensive options, we favor healthcare, developed market mega-caps and global telecommunications.
In addition, while Europe has been at the epicenter of the most recent bound of market volatility, 2011 has been a good year so far for core Europe and for Germany in particular. As such, we recently reiterated our overweight view on Germany.
Source: Bloomberg
