Credit Suisse’s Jonathan Golub says an upsurge in volatility may be feeding on itself, leading to further wobbles in a market that was on the verge of busting higher just weeks ago.
In a research report distributed Monday called “U.S. Equity Strategy: Post Traumatic Volatility Disorder,” Golub says a resurgence of volatility is under way and may take “perhaps 2-3 months” to resolve itself, with one measure, the Cboe Volatility Index trading near its historical average at 19.64 after a weekslong stint of hanging well below its statistical norm.
On Monday, trading offered signs of that hallmark volatility.
The Dow Jones Industrial Average dropped 126.93 points, or 0.5%, to end at 25,317.41, after opening up 117 points within the first few minutes. The S&P 500 shed 11.90 points, or 0.4%, to close at 2,755.88 and the Nasdaq Composite Index gained 19.60 points, or 0.3%, to finish at 7,468.63.
However, Golub says that there aren’t clear signs that this current bout of choppy trade that has sunk U.S. equity benchmarks will continue into the end of the year. In fact, Golub, during a CNBC interview Monday afternoon, speculated that the continuing slump for stocks may play out just as it did in February, when a downturn was eventually followed by an equity resurgence back to records.
Support for that theory may come from a separate Golub research note issued on Monday, where Credit Suisse analysts said 22.2% of the S&P 500’s constituents have posted third-quarter results and 76% of those have surpassed bottom-line estimates, with earnings-per-share estimates being beaten by 3.9%. Over the past three years 69% of S&P companies have beaten the bottom line, by an average of 4.8%.
The Dow is off 5.6% since its record high on Oct. 3, the S&P 500 is down 6% from its all-time high put in on Sept. 20, while the Nasdaq is down 7.9% from its Aug. 29 closing peak, according to Dow Jones Market Data.
Despite intraday swings that have become more common in U.S. trade, Golub sees few reasons to believe that the current setup suggests a more pronounced move is at hand.
Here are a few points that Golub outlines in his PTVD report:
- Market liquidity. Despite the recent sell off in stocks, spreads have been well-behaved and liquidity abundant
- Volatility across assets. While the VIX and VVIX (volatility of volatility) have spiked, similar metrics remain in check for non-U. S. equities as well as FICC markets.
- Currencies. Stress across major currencies seems quite normal, with the exception of the pound, on Brexit-related concerns.
- Bank CDS. Little systemic concern across financial institutions appears evident, save a small number of troubled European banks.