Rick noted what this means for the bond market; here’s my take on the two equity market implications.
More volatility. As I write in my latest weekly commentary, “The Fed in the (Market) Driver’s Seat?,” last week was marked by increasingly violent moves in equity markets. While stocks rallied on Friday, equities finished broadly lower on the week, and market volatility rose to its highest level since last March.
I expect the rocky road to continue, assuming that the recent volatility increase is at least partly being driven by expectations for normalization in monetary policy, coupled with stretched valuations in parts of the market.
Market Realist – U.S. equities (IVV) finished lower for the week ended October 3, 2014. Though stocks rallied in response to the September jobs report, all major broad market indices registered weekly losses.
The Dow Jones Industrial Average (DIA) fell by 0.60% for the week to close at 17,009. The S&P 500 Index (SPY) registered weekly losses of 0.76% to close at 1,967. The NASDAQ Composite Index (QQQ) declined by 0.82% to close the week at 4,475.
The losses extended to the next week. Both the S&P 500 and the Dow Jones plummeted 2% on October 9, 2014, marking their worst single-day performance since April. The week ended October 10, 2014, marked the third straight week of market losses.
Market Realist – The graph above shows the levels of the VIX index (VXX), the gauge for volatility for the S&P 500 (SPY). The volatility index levels for the Dow Jones and NASDAQ are also visible. Volatility started picking up in August. It’s currently back to levels we last saw in March. The upward trend is likely to continue as the markets keep reacting to geopolitical tensions and the Fed’s stance on increasing rates.
Read on to the next part of this series to see why increasing divergence between market sectors is the other theme you should focus on.