Broker Check

Uncertainty Fuels Risk-Off Sentiment

| January 28, 2020
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Economic data points remained relatively light during the week and left investors with few objective factors to consider when gauging risk sentiment. News of the coronavirus outbreak in China was immediately targeted as the culprit for domestic and international equity market volatility, a notion we do not necessarily agree with. Financial media outlets are often obsessed with tying a specific and observable reason to every reaction across equity markets as if though they’re convinced of why something is happening. We urge caution in such subjective analysis. Rarely are we ever confident that day-to-day movements can be entirely associated with a specific event and that an explanation should make immediate sense. In fact, over the very short-term, no one can say with certainty as to what may be driving the risk and return nature of global equity markets, notwithstanding alarming geopolitical issues (i.e. the latest bombing with Iran) or maybe direct threats to specific sectors of the economy (i.e. terrorist attack on the largest oil refinery in the world). Even under such scenarios, however, the likelihood of maintained volatility is often not something that remains an issue. This means caution is always warranted in attempting to react in an immediate risk-off sentiment at the announcement of such news.  Having said that, however, and focusing back on the latest news of the coronavirus, confirmed cases in the U.S. may generate a pause across investor sentiment over the next few months. The inability to truly gauge the severity of the issue, or even the ability to treat patients, has caused the WHO (World Health Organization) to remain firm in their communication that this virus should be taken very seriously. What that may mean for global equities remains subjective at this point and the entire situation has generated a new layer of uncertainty. Unlike risk, uncertainty cannot be quantified and managed, indicating that the current news cycle on the coronavirus provides little guidance on the path of equity markets. That didn’t stop Chinese equities, however, from capturing downside last week as the MSCI China index closed lower by -4.84%. Domestically, the Standard & Poor’s (S&P) 500 lost approximately -1% while its small capitalization counterpart closed the week lower by -2.23% (S&P 600).

On the topic of economic data points alluded to earlier, we learned during the week that existing home sales for December increased by more than had been anticipated. Such growth follows last week’s release of December new home sales which posted the best growth rate in 13 years. We are encouraged to see multiple housing data points reaffirm the notion of health in the housing sector and we remain optimistic in the ability for maintained strength throughout the year. It’s important to note that the notion of maintained strength, in our view, entails a more subdued environment with slower than anticipated growth yet one that does not necessarily contract. At least not over the next 12 months. As the eventual business cycle shift occurs, housing will face its own cycle as it has been observed in every business cycle shift in the past (some, obviously, with more severity than others). Nothing is new when discussing the concept of shifting business cycles (i.e. observed recessions before a next secular cycle can begin). By remaining objective in our risk management process across our multi-strategy investment platform, and by attempting to gauge the potential severity of the next business cycle shift, we may be able to pinpoint factors that reduce downside risks. Please note that reduction in risks does not mean elimination of risks.

Lastly, as it relates to the Senate impeachment trial, there appears to be no sign of systemic risks from the proceedings. The process is nearing its end and we’ll have more information soon.

Edison Byzyka, CFA – Chief Investment Officer


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocked designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P Small Cap 600 Index is an unmanaged index generally representative of the market for the stocks of small capitalization U.S. companies.

All return data sourced from Bloomberg.  All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. 


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