UBS House View Daily

Thought of the day

18.08 - The end of the summer lull?

The S&P 500 dropped by 1.5% on 17 August, the worst one-day fall since 17 May’s 1.8% decline and the second-largest one-day drop since 9 November 2016. Reasons cited for the drop ranged from speculation that a top White House economic advisor would resign (swiftly denied), an earnings report from one US tech company, to terrorist attacks in Spain.

We don't believe that any of these developments are a threat to our overweight in global equities. But investors may need to come to terms with choppier markets:

  • The recent episode of low equity volatility has been exceptional. For 15 consecutive sessions from 20 July – 9 August, the S&P 500 closed with a daily change of less than 0.3% – the longest such run since 1927. In late July, the VIX Index of option volatility was trading at its lowest level since the gauge was developed in 1990.
  • Market concerns over North Korea abated this week after China stepped up pressure and Pyongyang backed away from a threat to attack the US territory of Guam. But the US is unlikely to tolerate North Korea developing military nuclear capability. Worries over the stability of the Trump administration are also likely to persist. Given the probability of periodic flare ups in political risk, the recent period of ultra-low volatility could now be coming to an end. Investors should prepare for this.

So while we don't see recent developments as a reason to reduce risk, and remain confident in our pro risk stance, we still stress the value of diversifying (even our tactical overweight position in global equities is inherently diversified), long-term investment themes, and potentially hedging. These can mitigate risks and reduce volatility, while enabling investors to go on benefiting as markets grind higher, backed by strong economic and earnings fundamentals.

Chart of the day

The end of the summer lull?

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