BlackRock Chief Investment Strategist Russ Koesterich discusses the catalysts for the brutal equity selloff and its key takeaway for long-term investors.
The recent erosion in equities turned into an all-out landslide last week. Globally and in the United States, stocks were in correction mode, with equities in emerging markets and Europe in a bear market.
The selling extended into other asset classes, notably commodities and high yield, and has been accompanied by an abrupt spike in market volatility. According to Bloomberg data, the VIX Index, a proxy for U.S. equity market implied volatility, traded over 50 on Monday morning, the highest level since the financial crisis.
Market Realist – Though stocks ended last week slightly higher, it was a wildly turbulent week for equities. The S&P 500 (IVV) ended the week at 1,988, up 0.91%, while the Dow Jones Industrial Average (DIA) closed the week up 1.1% at 16,643. The NASDAQ Composite (QQQ) registered its highest weekly gain in almost two months, climbing 2.6% to close at 4,828.
The Dow Jones swung by a dizzying 10,000 points last week—plummeting to its eighth largest loss ever (588 points) on Monday August 24, 2015. It swung the other way to register its third largest gain ever of 619 points on Wednesday, August 26. The S&P 500 (VOO) suffered its worst intraday reversal in the past four years, losing almost 4.8% in a day in a scary flashback to the financial crisis.
Volatility (VXX) surged last week. It peaked to 51%, its highest in almost four years, and receded to settle at 26% by the end of the week. This second graph shows the volatility indices of the three major broad market indices as measured by CBOE. The return of volatility after more than three years of relative calm spooked investors, driving them to offload their positions.
The recent selloff was a product of various macroeconomic factors—the global growth slowdown, the reeling Chinese economy, and the fears of a rate hike from the Federal Reserve. We’ll explore these issues in the next part of this series.