Volatility: The Round Trip to Nowhere

Not much has happened in markets this year so far. The S&P is down 1%. BBB spreads are actually tighter YTD. So, in fact, are many high quality sectors.

But boy what a round trip to get nowhere! The S&P was up 7.5% at one point. Similarly, WTI crude is flat on the year but at one point was up 9.5%. Last week the Dow took a 20,000 point round total price journey!

In a word, volatility has returned. The suspected culprit is the unwind of QE – government buying accounted for most of the multiple expansion in equity markets over the last bull market. Now, if that process is reversed, equities may suffer even as earnings improve in a growing economy.

As the better credits have remained firm, HY Credit spreads have widened this year. Covenants are weaker than they were 10 years ago. It may take a while for defaults to flow through the system. But the system shows fear for the first time in a long, long time. Bond investors on DealVector are paying attention. Where does the road lead next?