Blog Posts — March 2, 2018

Volatility Makes a Comeback: February Market Review

Volatility returned to markets in February, whiplashing investors accustomed to a long stretch of solid and stable returns, and causing the worst monthly performance in two years for global equities.

During February, the STOXX® Global 1800 Index slumped 4.1%1 when measured in dollars, its first month of losses in 16. It was also the worst monthly performance since Jan. 2016. The index fell only half that much when measured in euros, after a 1.8% decline in the common currency over the month increased the relative value of dollar-denominated holdings in the index.

In this period, the STOXX® USA 900 Index declined 3.7%, falling from a record high as did the Global 1800. The EURO STOXX 50® index of blue-chip companies in the Eurozone lost 3.8%. The pan-European STOXX® Europe 600, which includes companies from non-euro nations, retreated 3.8%.

Global indices slumped to a monthly trough on Feb. 8, but pared losses thereafter. The Global 1800 index fell as much as 7%, avoiding a so-called correction, a name popularly given to pullbacks of 10%.

A widely cited reason for the downtrend was the jump in U.S. bond yields, which puts pressure on asset and financial returns. Some have also pointed to products that bet against an increase in volatility as having exacerbated the sell-off.2 Others simply say that, following a record-breaking run in recent months, a market correction was due.

Higher yields and volatility

The yield on ten-year US Treasurys climbed to 2.95% on Feb. 21 from a close of 2.71% in January, as data pointed to firming inflation in the US.

The rapid gyration in securities resulted in some of the highest trading turnover recorded in years. At Deutsche Boerse, cash markets registered the highest February volumes since 2008.

The EURO STOXX 50® Volatility Index, or VSTOXX,® jumped to 35 on Feb.9, from an average daily reading of 12 in January. A daily average of almost 82,000 futures contracts on the volatility gauge traded on Eurex during the month, a 53% jump over the January average.

Tech manages to score positively

The STOXX® Global 1800 Technology index bucked the losing trend among 19 supersectors, rising 0.5%. Some tech heavyweights staged a strong rebound from the sell-off in the early days of the month. Apple Inc., in particular, rallied 15% from the February lows after Warren Buffett’s Berkshire Hathaway disclosed on Feb. 14 it had boosted its stake in the maker of mobile phones and laptops.

The STOXX® Global 1800 Oil & Gas index, at the other end, lost 9.2%. Overall, the 19 supersectors had an average drop of 4.7%.

Three out of 23 developed national markets tracked by STOXX managed to score a positive local-currency return in the month. These included measures for Finland, Norway and Australia. The STOXX® Spain Total Market index was the worst performer, shedding 5.7%.

Index of the month

Amid the unusual market stress, a portfolio of equities constructed with the aim of fending off volatility better than a market-capitalization portfolio achieved its objective.

The STOXX Minimum Variance indices represent a universe of stocks that are far less volatile than those represented in traditional market-cap-weighted indices. But not only do they track the stocks that have exhibited the lowest individual levels of historical volatility; they also take correlation risk into account. The STOXX Minimum Variance indices use a risk model based on factors such as leverage, liquidity and momentum to estimate a covariance matrix and construct the optimal minimum variance index.

The STOXX Minimum Variance Indices come in two versions: constrained and unconstrained. The former have a similar exposure to a market-cap index but with much lower risk. The unconstrained version, on the other hand, has complete freedom to fulfill its minimum variance mandate.

The STOXX® Global 1800 Index Minimum Variance Unconstrained and its constrained version both fell 3.4% in February, around 66 basis points less than their benchmark.

Featured indices

1 All returns include dividends net of taxes.
2 Mohamed A. El-Erian, ‘10 Things to Know About the Stock-Market Selloff,’ BloombergView, Feb. 9, 2018.