Volatility surge and retreat — Market Insights (August 2024)

The VIX, or the CBOE Volatility index, hit 38.6, a one-year high on 5 August, following the release of a weaker-than-expected job report.

Very quickly though, in a number of days, the VIX calmed and came back down, now hovering in the 14 - 17 range, less than half of its level on 5 August. 

The reasons for the spike in volatility have been discussed in the previous month’s commentary. This episode however serves as a good example as to how resilient markets are and the futility of market timing.

The calm after the storm

The equity markets ended August on a positive note, with Europe returning 3.94%, outperforming the other major markets. 

The US came in relatively weaker with the S&P 500 Index gaining 2.4% for the month. Even Japan’s TOPIX, which declined by 20%, rebounded and ended the month with a slightly positive return - 0.3% in USD terms. Emerging markets, once again, lagged their developed counterparts, by a slight margin.

In terms of style factors, there was a rotation to value in the US with value stocks outperforming growth stocks by almost 1%. In developed markets outside of the US, growth was still very much in favour. 

In emerging markets, value and growth were almost neck to neck. Small caps in EM outpaced their larger peers, while small caps in the US had a difficult month, generating a slightly negative return.

The Fed's long-awaited rate cut

August was a volatile month for fixed income but most major fixed income indices ended the month in positive territory. 

The US market did better than other major economies in the period leading up to the US Federal Reserve’s policy-setting meeting, even though there were concerns about the health of the US economy. On 18 Sep, the Fed lowered its federal funds rate target range to between 4.75% and 5% from 5.25% to 5.5%. 

The expectation for the September rate cut, combined with weaker manufacturing indicators and US job data caused a decline in yields. Bond prices and market volatility spiked to levels not seen since 2020. US corporate bonds, especially riskier high yield bonds, performed better than safer “investment-grade” bonds.

In other countries, bond markets saw smaller gains. Weak manufacturing data in Europe pointed to a downturn in the economy, so expectations for interest rate cuts in the Eurozone rose, with a 0.25% cut from the European Central Bank expected in September.

In the UK, the Bank of England cut interest rates on 1 August. With falling unemployment and improved job data, it looks like the UK economy is recovering. Markets are expecting three more interest rate cuts in the UK over the next six months, with the first likely in November.

The US dollar weakened against other major currencies, reflecting expectations of more significant rate cuts in the US.

The S&P GSCI declined again in the month of August. Within the index, the industrial metals, precious metals and agriculture sub-sectors gained, albeit modestly. Energy, as a whole, was the weakest sub-sector.

Building a long-term resilient portfolio with Endowus Hong Kong

Nobel prize-winning economist Harry Markowitz called diversification "the only free lunch in finance".

Spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With the digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.

Click here to get started on your investing journey with Endowus Hong Kong today.

<divider><divider>

Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Opinions

Whilst Endowus HK Limited (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.

No invitation or solicitation

Neither the information, nor any opinion, contained in this article constitutes a promotion, recommendation, solicitation, invitation or offer by Endowus or its affiliates to buy or sell any securities, collective investment schemes or other financial instruments or services, nor shall any such security, collective investment scheme, or other financial instruments or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. This is not intended to be an invitation or offer made to the public to subscribe for any financial product or other transaction.

This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.