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Market Perspectives - July 2017


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Market Perspectives - July 2017

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Market Perspectives - July 2017

  1. 1. Market Perspective – July 2017 Experience Insight Impact Overview: With half of 2017 behind us, market volatility remains unusually tranquil. This month, we explore the perplexing lack of volatility and compare this to prior periods. While the old adage remains true, “past performance is not an indication of future results,” there are of course lessons to be learned. In this case, we are simply reminded that volatility, albeit temporary, and market price swings are a normal part of the investment process.
  2. 2. Market Continues to Move Higher Without Significant Corrections 2 Experience Insight Impact According to CNBC, “since 1950, there has been a 5 percent temporary pullback in the market in 91 percent of years from then until now.” Another way of thinking about this is that market drawdowns are NORMAL parts of the investment process. Recent market price action has proven highly unusual.
  3. 3. We Are In an Extended Period of Record Low Volatility 3 Experience Insight Impact VIX reflects options traders’ expectations of market volatility. We must remind ourselves that expectations are often far from reality. Volatility is a measure of magnitude in price fluctuations. CBOE Volatility Index (“VIX”) is an implied measure of market’s expectation of 30-day volatility calculated from option’s pricing on the S&P 500 Index. Large, frequent declines generally lead to higher VIX levels. As evident from the record-low levels of VIX, the market does not expect much price volatility. The “fear” gauge is low.
  4. 4. The History of Prolonged Low Volatility 4 Experience Insight Impact As investors in markets, we should always keep in mind that no market solely goes up and corrections can be healthy. However, while prudent to be cautious, long winning streaks of the S&P 500 alone does not lead us to believe that a sell-off is imminent. As shown in the chart above, there are numerous instances in the past with longer and higher winning streaks.
  5. 5. It Is Unclear Whether VIX Levels Predict Market Returns 5 Experience Insight Impact There is insufficient evidence and often conflicting studies regarding market returns at different VIX levels. While Schaeffer’s Investment Research reports that markets 1- and 3-month returns were higher for very high VIX levels, T. Rowe Price states the opposite with 12-month returns.
  6. 6. Not All Signs Point to “Complacency” 6 Experience Insight Impact Not all indices point to “complacency”. For example, the SKEW Index, which measures the perceived tail risk of the market via the pricing of out-of-the- money options, is at a higher end. A higher SKEW level implies a higher demand for extreme market protection. 2017 Bloomberg Finance L.P.
  7. 7. Conclusion: As noted, the current period for the markets has been highly unusual from a volatility perspective. We anticipate that over time, markets will return to a normal state of being with a wider range of up and temporary downtrends. As investors with a long-term focus, we remain vigilant to avoid complacency and look forward to taking advantage of market opportunities as they present themselves. Experience Insight Impact Market Perspective – July 2017 7
  8. 8. Experience Insight Impact Disclaimer Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8