After a long period of calm, volatility may be back

Volatility Chart

Since the beginning of October concerns about signs of weaker growth abroad have outweighed positive US corporate earnings reports and global stock market volatility has gone extreme. The Dow Jones Industrials saw triple-digit swings several days in a row that wiped out all of the index’s year-to-date gains. This volatility sent investors once again seeking the relative security of U.S. Treasuries. As the price of the benchmark 10-year note has risen, the decline in its yield has accelerated in each of the last four weeks; the 10-year yield briefly dipped below 2% and is now around 2.14%. While the US equity markets have changed direction dramatically just since the beginning of the month, there is still reason to be optimistic.

Jobless claims decreased by 23,000 to 264,000 in the week ended Oct. 11, the fewest since April 2000. “This is a little bit heartening to remind everybody that the U.S. economy so far seems to be doing pretty well,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut.

Grounds for optimism also include the lowest unemployment rate in six years, a deleveraging of debt by companies and households and the likelihood of cheaper energy and low bond yields will support consumer spending and business investment.

“Things aren’t looking bad enough in the rest of the world to drag the U.S.,” said Peter Hooper, chief U.S. economist at Deutsche Bank AG and a former Fed official. “I wouldn’t say the world’s falling apart by any means.”

Covenant Trust believes that this current period of price volatility is not unexpected and while it makes for dramatic headlines — it is certainly not a reason to be getting out of the markets. Staying invested for the long term is the right course.

Covenant Trust Company Investment Department

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