This dichotomy between the U.S. and the rest of the world was stark, but economic resilience at home does not mean U.S. assets are immune to the global slowdown. The S&P 500 Index traded down last week due to the possibility of an early rate hike and on concerns over global growth. Volatility spiked, consistent with a further widening of credit spreads. The sell-off in high yield, over the last few months, has been largely driven by growing concerns over energy issuers.
Market Realist – After a calm 2014, volatility has spiked in 2015, as the stock market faces many headwinds.
The volatility index or the VIX (VXX) is often called a “fear gauge.” The higher the index level, the riskier investors perceive the stock markets to be.
For most of 2014, the VIX remained low, as the US economy was on a strong footing. However, late last year, the index spiked on the back of softening global growth. This year, so far, it has been generally higher than last year, as the graph above suggests. The average level for the whole of last year was 14.2. The average for this year so far is 17.1, which is closer to the long-term average of ~20.
Unexpectedly good earnings, especially in the technology space (QQQ), saw the S&P 500 (SPY)(IVV) hit another all-time high of 2115. However, the headwinds cited in Part 1 of this series led to increased volatility.
Meanwhile, the high yield bond segment (HYG), which is considered a risky asset—like stocks—has seen a rise in yields, mainly due to the massive slump in oil (USO) prices. Approximately 15% of high yield bond issuers belong to the energy sector. Their revenues have been battered by lower oil prices, which has increased the chance of a default cycle.