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Main Management Reviews Q1 Market Volatility and Its Impact on the Uncertainty Index

Posted by WrapManager's Investment Policy Committee
April 12, 2018

Main-Management-WMTaking A Look Back at Major Market Milestones of First Quarter 2018

The first quarter of 2018 was anything but a continuation of the market behavior we saw in 2017. After historically low volatility and positive total returns for each of the 12 months in 2017, January continued the trend of higher markets with nearly historic lows in volatility. Then came February. Registering volatility levels below 15 for the month of January, the CBOE Volatility Index (VIX) spiked 116% on February 5, the highest daily move ever recorded. On that same day, the Dow Jones Industrial Average plunged 1,175 points, or -4.6%, its largest single-day point decline in history and the worst day performance-wise since August 2011. The volatility spike was so violent that it even resulted in the shutdown of a widely-traded inverse VIX product. 

The natural questions that arise are: what caused this spike in volatility and why did we continue to see higher levels throughout the rest of the quarter? Will it remain this way? The short answer to the last question is almost certainly yes. The volatility levels we saw in 2017 were historically low and a return to a higher baseline would be typical in a period of higher rates. Higher volatility is also likely here to stay as fundamentals are starting to change for the first time in quite some time on a broader, macroeconomic level.

Returning to the VIX, it is important to remember that while it is colloquially known as the “Fear Index,” a more appropriate moniker might be the “Uncertainty Index.” Its increase reflected what would be normal given the increased level of uncertainty that the recent economic data is introducing into the markets as it is starting to show cracks. Add to that the rhetoric coming from the White House on tariffs, resulting fears of a trade war, and uncertainty about how many more times the FOMC will hike interest rates this year (they have already hiked once as expected), and we’re in a prime environment for increased volatility that did not show any signs of relenting towards the end of the quarter.

Download Main Management's complete Q1 2018 Market Recap here. In it you'll get a visual breakdown of how first quarter 2018 sector returns compare to 2017 and an review of how first quarter 2018 asset class returns compare to 2017. 

To learn more about Main Management's investment style, request a report on their investment style, management and history here

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