Last Monday, the VIX Index - a measure of volatility often
referred to as the "
" - hit a 13-month high of 21.44 and U.S. stocks registered their
worst day since last June. By Thursday and Friday, however, U.S.
stocks rallied significantly, with back to back days of 100-plus
gains in the Dow Jones Industrial Average. What's going on?
Volatility, welcome back.
Greater volatility can mean big swings in the market - up or
down. That's what we saw last week, and as I write in
my new weekly commentary
, I believe investors should expect more of such volatility
While commentators have focused on
the turmoil in emerging markets
as the reason for recent rocky market performance, I place much
of the blame on disappointing U.S. economic reports. Last week's
disappointing U.S. nonfarm payroll report
brought more evidence that structural issues continue to bedevil
the U.S. labor market. U.S. job growth remained stalled in
January, the second month in a row in which job creation came in
far below expectations.
And the jobs report was not the only soft economic print last
week. Last Monday, the ISM report -
key manufacturing survey
- came in well below expectations, and the new orders component,
which tends to lead gross domestic product growth, plunged.
Looking ahead, the combination of further soft economic data,
ongoing policy uncertainty
and turbulence in emerging markets means more volatility in
Given this volatility, many investors may be wondering:
"Should I pare back my equity exposure?" My answer to the
question is no. I continue to advocate that investors
stick with stocks over bonds
. While I expect a rockier ride and more muted gains in 2014, I
believe stocks still offer better value than bonds. In fact, the
drop in interest rates that has accompanied the recent selloff
has made bonds look even more expensive in comparison to
As such, I continue to believe that equities will outperform
bonds this year, and I view recent market softness as
an opportunity to selectively add to equity
and trim bond exposure.
It's also worth noting that last Monday's selloff in U.S.
equities was well below the traditional 10 % threshold that has
typically defined a
in the past. In short, it's not that volatility is so bad, but
that we've all become conditioned to an unusually tame market.
While market volatility looks bad as compared with the placid
markets investors got used to in 2013, the VIX merely reverted
back to its long-term average last Monday.
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
Sources: Bloomberg, BlackRock research