Markets have continued to fall in recent days, with sharp drops in Asian stocks this morning and a further decline in European as well as in U.S. markets today.
On Wednesday the S&P 500 declined by 3.3%, its worst drop since February, and the Nasdaq Composite fell by more than 4%, its worst drop since 2016. The VIX Index rose by over 7pts to close at almost 23, its highest level for six months. In Europe, the Euro Stoxx50 fell to its lowest level since February 2017.
In this piece we look at key reasons for recent market volatility and provide our outlook on these issues. Recent market moves bear our leading 2018 theme: forewarned is forearmed. As we have repeatedly out, volatility was likely to increase in this late-cycle environment and we think that it will stay at high levels: we are facing a repricingof risks and this will have broad implications for asset values. But, as we argue below, we believe that market concerns are resolvable and do not expect this to escalate into a full-blown market crisis. It is worth remembering that market corrections of this magnitude on the S&P 500 are not historically uncommon and that the recent lack of them has been atypical. We also expect the global economy to keep growing, if at a slower pace than we expected at the beginning of the year. Both these factors should provide some reassurance.
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