Investment Insights

Investment Insights: Recent Volatility

23 October 2018

By Cliff Aque, CFA, Investment Strategist

The pullback in the U.S. stock market during the first few weeks of October is reminiscent of what happened this past January into February, only slightly less dramatic in terms of the correction. In both instances, the market experienced strong returns during the three months leading up to the peak, while interest rates rose considerably over the preceding month. The rise in real interest rates was even more pronounced during that preceding month, meaning higher inflation was expected. In both cases, the market took a step back, declining for ten trading days in the first instance, and assuming October 15, 2018 was the latest trough, nine days in October.

Volatility is here to stay, as evidenced by the market’s strong rebound on October 16th and subsequent pullback on October 18th, but it is important to remember that pullbacks in the stock market are normal. This most recent one has a number of contributing factors beyond rising rates and inflation concerns, such as divergent stock market returns, slowing growth outside of the U.S., and political concerns. 

The U.S. stock market and economy had decoupled from the rest of the world in 2018 with strong market performance and a growing economy. Prior to October 10, 2018, U.S. equities were up 8%, while the international MSCI EAFE Index was down 7%, and the MSCI Emerging Markets Index down 14%. The rest of the world, while still growing, has seen growth slow this year and the outlook has been muddied by tensions in the European Union (e.g., disagreements with populist Italy and Brexit negotiations), and continued trade tensions between the U.S. and China.

Mid-term elections loom in the U.S. with a contentious political environment, but history suggests that these concerns should not affect the market regardless of the outcome. Historically markets have corrected during the year leading up to the election and rebounded after the election. If third quarter earnings are strong, as we expect them to be, the stock market should benefit and continue to rise over the next six months barring any geopolitical or U.S. political shocks.


Past performance is no guarantee of future results. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. The opinions and views of third parties do not represent the opinions or views of Calamos Wealth Management LLC. Opinions referenced are as of the date of publication and are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Indexes are unmanaged, do not reflect fees or expenses and are not available for direct investment. The S&P 500 Index is a measure of the U.S. stock market. The MSCI Emerging Markets Index is a measure of the equity market performance of emerging market economies selected by MSCI. The MSCI EAFE is a measure of the equity market performance of developed markets outside of the U.S. and Canada. Real Yields on Treasury Inflation Protected Securities (TIPS) at "constant maturity" are interpolated by the U.S. Treasury from Treasury's daily real yield curve. These real market yields are calculated from composites of secondary market quotations obtained by the Federal Reserve Bank of New York. The real yield values are read from the real yield curve at fixed maturities, currently 5, 7, 10, 20, and 30 years. This method provides a real yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.