Volatility returns to annual highs in 2023 and with it the turbulence in the stock markets. The protections of large investors against potholes in the stock market as well. The VIX index, a reference for movements in options on the S&P 500, climbed this Tuesday above 23, its highest level in 2023, in a day of widespread falls on Wall Street and moderate red numbers in Europe with the return of geopolitics to the forefront of current events in the markets. Dow, S&P and Nasdaq closed with declines of more than 2% dragged by technology.
As the anniversary of the start of Russia’s war on Ukraine approaches, and after President Biden’s visit to Kiev, the big story of the day for investors was Russian President Vladimir Putin’s speech, which raised fears of a resurgence of the conflict. The Kremlin not only endorsed its annexationist policy on Ukraine but also pointed to a longer war and suspended Russia’s adherence to the nuclear weapons non-destruction treaty, also threatening to use them.
Investors’ turn towards geopolitics overlaps with the swell of fears of a lengthening of the rate hike cycle in the US and Europe in the coming months due to the economic strength and the fact that inflation refuses to drop to the levels sought by the Fed and the ECB to defuse their monetary offensive, which began a year ago after the outbreak of the war in Ukraine. Not even the drastic drop in energy prices has managed to stop central banks. On the contrary, the economic improvement and the strength of employment have been sustained by the lower than expected impact of energy costs, according to experts.
“Although a ‘no landing’, as the scenario in which the developed economies avoid recession and maintain a moderate rate of growth has been described, would in principle be the most positive for the markets, since in this way it would also avoid the recession of results expected by many investors, the main problem is that this scenario would make it more difficult for central banks to fight inflation, so they would be forced to act more forcefully in terms of interest rates than they have been up to now discounting the markets”, point out the experts of the broker English Link Securities.
For some brokerage firms. This can also speed up a removal of bags due to the good start of 2023 and that business results are indeed contracting, making valuations more expensive. According to Morgan Stanley’s stock strategies, cited by Bloomberg, US stocks are showing a warning sign that the S&P 500 could fall as much as 26% in the first half of this year because valuation ratios have risen as high as Highs since 2007. The team led by Michael Wilson got it right in 2022 “It’s time to return to base camp before the next profit guide,” he says.
Bank of America strategist Michael Hartnett forecast the S&P 500 to fall as low as 3,800 by March 8, implying falls of about 7% from current levels. This expert was also correct in his forecast that the stock market rally would end before Valentine’s Day, after a start to the year in which the risk-return formula is expelling large investors from the stock market to go into fixed income. Spreads between corporate bond interest and Treasury debt have fallen to multi-decade lows, even among the lowest quality.
In the bond market, which experts recommend paying attention to in times of uncertainty, it has again dictated the direction of the markets. The interest on the 10-year US bond climbed on Tuesday to close to 4%, a psychological level that in the past has caused corrections on Wall Street of up to 10%. This is the case, for example, of 2018 or, without going any further, at the end of the summer of 2022 that led to the lows for the year. However, in another day marked by corporate results, the Dow Jones ended with a fall of 2%, the Nasdaq 2.5% and the S&P 500 ended up losing the level of 4,000 points, another indicator that investors can begin to consider as a bearish sign.
