U.S. stocks have been rattled in August by a rise in real interest rates and bond-market volatility, yet “very little about this selloff strikes us as fundamentally worrisome,” according to DataTrek Research.
Real yields, which are adjusted for inflation, of more than 2% on 10-year Treasurys are “unheard of over the last decade,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Tuesday. “We are there now,” he said. “Eventually these will settle out, and after that we expect stocks to find their footing and start moving higher again.”
While volatility in the U.S. stock market has recently increased, it remains below its long-term average. And August’s slump in equities is not entirely due to Big Tech stocks that had driven the market’s rally earlier this year, according to DataTrek.
“Apple is the only Big Tech company really hitting” the S&P 500, said Colas. “Apple’s weakness aside, US Big Tech has been holding its own during this month’s selloff.”
Shares of Apple Inc.
AAPL,
The seven U.S. Big Tech stocks in the S&P 500 — Apple, Microsoft Corp.,
MSFT,
Nvidia
NVDA,
Meanwhile, the CBOE Volatility Index, known as the stock market’s fear gauge, has continued to run below its long run average of 19.6 since 1990 as well as levels seen earlier this year, according to DataTrek.
“Even with the recent (modest) VIX spike, August is looking fairly quiet relative to January – May,” said Colas, referring to the index’s ticker. “That’s predominantly – but not exclusively – good news.”
The CBOE Volatility Index, whose measure of expected volatility of the U.S. stock market is derived through options tied to the S&P 500, was trading around 17.4 around midday Tuesday, FactSet data show. That’s below its levels seen during the first quarter.
“On the plus side, it says sector and stock price correlations to the overall market remain low,” said Colas. “This is a sign that investors are still differentiating along fundamental lines rather than macro concerns.”
The U.S. economy is chugging along with “still decent” corporate earnings, which are expected to improve on cost cutting in future quarters, according to DataTrek.
But he cautioned that investors still face Federal Reserve Chair Powell’s Jackson Hole speech on Aug. 25. Investors will be weighing his remarks against their macroeconomic concerns, including the trajectory of inflation and the recent move higher in Treasury yields.
Bond-market volatility, as measured by the MOVE index, has been running at elevated levels, whereas the CBOE Volatility Index is signaling “stocks are ‘OK’,” said Colas.
Meanwhile, the S&P 500, SPX which gauges the performance of large-cap stocks in the U.S., remains up more than 14% so far this year, based on Tuesday trading levels around midday. That includes a decline this month of more than 4%.
“The overall trend in U.S. large cap volatility is still lower, even with this month’s selloff,” said Colas. “We won’t count all our chickens until August is over, but this is good news so far.”
