Nerves Rattled in U.S. Equities Amid Ugly Volatility

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To Paul Zemsky, the challenge in the stock market is to keep your head while others are losing theirs.

“As an investor, what I’m thinking right now is don’t panic,” said the 52-year-old head of multi-asset strategies at Voya Investment Management LLC in New York. He spoke as the Standard & Poor’s 500 Index staged one the most volatile sessions in three years, rising as much as 1.4 percent and falling 1 percent as West Texas Intermediate crude briefly dipped below $45 a barrel and copper hit its lowest level since 2009.

“Every time oil goes down into a new range, those fears reignite,” Zemsky said in a phone interview. “Will something happen in Russia? Will a hedge fund blow up? Which banks will get hammered by this?”

Signals from energy and bond markets rattled stocks for an eighth day as the Chicago Board Options Exchange Volatility Index climbed above 20 yesterday and the Dow Jones Industrial Average pared a loss that reached 143 points. The euro slumped to a nine-year low on bets policy makers will ramp up stimulus, while yields on 10-year Treasuries fell to match a 20-month low.

Concern about the impact of plunging oil on investment and what falling yields signal about economic growth are testing the resilience of U.S. stocks that have tripled since 2009. The stress pushed a Bank of America Corp. gauge of hedging costs in bond, stock, currency and commodity markets to an 18-month high.

Scratching Heads

The S&P 500 dropped 0.6 percent to 2,011.27 at 4 p.m. in New York. The gauge slid as much as 1.7 percent during the day as data showed retail sales unexpectedly slumped last month and the World Bank cut its global growth outlook. The VIX jumped 4.5 percent to 21.48, gaining for a fourth day.

“This market has been very difficult to explain day-to-day,” Walter Todd, who oversees just over $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said by phone Jan. 12. “Oil continues to drop 2, 3, 4 percent, day in and day out, and people are scratching their heads saying, ‘Why is the 10-year yield below 2 percent if the economy is doing so well?’”

The VIX, a gauge of demand for protection against losses in U.S. equities, has fluctuated more than 10 percent in three trading sessions since Dec. 31, something that happened on only 16 percent of days last year. It climbed 4.9 percent to 20.56 yesterday.

U.S. stocks slid 1.6 percent from Jan. 9 to Jan. 12 as data showed a decline in American wages and oil prices dropped to a five-year low. Earlier last week, equities soared 3 percent in two days after minutes of the Federal Reserve’s last meeting indicated no change in their approach to rates.

The S&P 500 has swung an average 0.95 percent daily in 2015. That’s almost double the daily price change of 0.53 percent in 2014, the calmest year in U.S. stocks since 2006.

Inflation Outlook

Tumbling oil prices have crimped the outlook for inflation, depressing yields on 10-year U.S. Treasuries to the lowest since May 2013. Bank of America’s Market Risk Index, derived from implied volatilities in stocks, Treasuries, currencies and commodities, touched the highest level since July 2013 on Jan. 7 and has remained around there since.

“The velocity of oil’s plunge has made it very difficult for markets to take,” Quincy Krosby, a market strategist based in Newark, New Jersey at Prudential Financial Inc., which oversees more than $1 trillion in assets, said by phone yesterday. “It bleeds into other assets and that’s what we’re seeing here.”

Options on an exchange-traded fund tracking crude futures cost around the most in three years. The CBOE Oil ETF VIX Index, derived from hedges on the U.S. Oil Fund LP, climbed 57 percent from Dec. 5 through yesterday. Bank of America Merrill Lynch’s MOVE Index, which measures swings in Treasuries based on options, was 33 percent above its 12-month average of 62.36.

Economic Outlook

A surging U.S. dollar and weakening euro, plagued by the dividing economic outlook between the U.S. and Europe, boosted a JPMorgan Chase & Co. gauge of currency swings to the highest since September 2013 last week.

While the Fed is slated to increase interest rates sometime this year, the European Central Bank is considering monetary stimulus measures that may include sovereign-bond buying. The euro’s one-month implied volatility versus the dollar rose to 10.21 percent on Jan. 7, the highest level since August 2012, as the Bloomberg Dollar Spot Index surged to the highest level in at least 10 years.

‘Best House’

This earnings season will help justify some of the highest stock-market valuations since 2010, according to LPL Financial Corp.’s John Canally, who predicts the S&P 500 will gain up to 9 percent this year. About half of the companies in the index are scheduled to release quarterly earnings this month, Bloomberg data show.

“The one thing we’re focused on here is that the U.S. continues to be the best house on the bad street,” Canally, chief economic strategist at LPL Financial, which oversees $464.8 billion, said by phone Jan. 12. “We’re only being driven by the macro right now and we’re in that mode until the bulk of earnings come out. Once we focus on the micro, that’s when stocks can make their gains.”

The S&P 500 moved 49 points from peak to trough in its last session, the biggest intraday swing since Oct. 15, when the benchmark gauge erased nearly all of its 3 percent decline. Yesterday marked the fourth time in over three years when the S&P 500 rose more than 1 percent and then closed the day lower, data compiled by Bloomberg show. It ended the session down 0.3 percent at 2,023.03.

Trading in S&P 500 futures accelerated as U.S. stocks erased gains between 1 and 1:30 p.m. in New York. About 77,000 contracts in the Chicago Mercantile Exchange’s e-mini changed hands between 1:10 and 1:20 p.m. and about 74,000 were exchanged between 1:20 and 1:30 p.m., data compiled by Bloomberg show. In both cases volume was three times greater than the 10-day average.

“There’s a little bit of a different feel to the volatility,” Alan Gayle, who helps oversee about $45 billion as a senior strategist at Ridgeworth Capital Management, said by phone. “The chance of all of these divergent forces coming together is something that could be a problem. Market momentum has turned softer. I’m not buying every dip.”