Stock investors shouldn’t get used to the relative calm that markets are now showing, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.
Volatility is likely to rise this year, Garthwaite wrote yesterday in a report. He attributed the outlook to excessive borrowing in developed economies, which ensures that investors will be “abnormally sensitive” to shifts in economic growth and government policy, he added.
The CHART OF THE DAY compares the volatility of the Standard & Poor’s 500 Index and the performance of the Chicago Board Options Exchange Volatility Index, or the VIX, since the beginning of last year. The VIX indicates the level of concern among investors about future share-price swings.
“Sentiment in the market has clearly changed over the past three months,” wrote Garthwaite, who is based in London. Both volatility gauges erased almost all of their gains from last year’s second-half stock slump. The reading for the S&P 500 dropped below 20 yesterday for the first time since Aug. 3.
Even so, developed-country debt is still $8 trillion too high, the report said. Garthwaite came up with that estimate by comparing the borrowing relative to gross domestic product with a figure based on the debt-to-GDP ratio’s trend during the past three decades.
The need to reduce this burden creates “a considerable amount of tail risk,” or potential for unlikely stock-market outcomes, the report said. He mentioned 11 possible surprises for this year. One was a breakup of the euro region, which he estimated would send the S&P 500 falling to 800, or 38 percent less than yesterday’s close.