March 28, 2018 / 10:31 AM / a year ago

Commentary: Q1 was a torrid time for markets, expect more of the same in Q2

LONDON (Reuters) - Investors take into account a welter of economic, financial and political information when deciding where to put their money. News and events - some foreseen, some out of the blue - shift that dial constantly. Stuff happens. Always.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 26, 2018. REUTERS/Brendan McDermid

But by any measure, the first quarter of this year was particularly eventful. From the biggest rise in stock market volatility ever to surging global trade tensions, from deepening tumult in the White House to the first cracks appearing in the mighty tech sector edifice, investors had a lot thrown at them.

After an impressive run that saw world stocks chalk up a record 15 consecutive monthly gains, it eventually became too much. The S&P 500 and Dow are both down for the year, European stocks are their lowest in over a year and investors are taking cover.

Professor Bob Aliber at the University of Chicago goes as far to say U.S. stocks may have peaked on Jan. 26, and that Wall Street is on the cusp of a secular downturn that will see stocks crash by as much as 50 percent in the months and years ahead.

That’s the bearish view, and a pretty extreme one at that. Market bulls will point out that global GDP growth is the strongest in years, corporate profits continue to expand at a healthy clip, and global liquidity remains plentiful despite the gradual tightening of global monetary policy.

Add all that together, and any declines should be viewed as a buying opportunity.

 (For a graphic showing Global markets in Q1, click here:

So what, if anything, does this portend for Q2?

Many of the amber warning signs from Q1 are still flashing - protectionism and growing global trade tensions, a high degree of unpredictability surrounding U.S. President Donald Trump’s policy and personnel, flattening yield curves and widening credit spreads.

Perhaps the defining characteristic of Q1, which will also go a long way to shaping Q2, was the return of market volatility, at least in equities. True, it has subsided following the explosion in early February, but it hasn’t returned to its pre-“volmageddon” lows.

Between the U.S. presidential election in November 2016 and the first week of February this year, the VIX index of implied volatility on the S&P 500 rarely got above 15 percent. It spent months hovering at and around record lows below 10 pct.

 (For a graphic showing VIX volatility index, click here:

But since early February, it has been below 15 pct only once. Hardly alarming, but it’s a noticeable change from what investors had become used to.

Higher volatility means investors are likely to be more risk averse, even if it’s only at the margins. More volatility may be a potential headache for investors, but not for policymakers.

“I wouldn’t be concerned. I look forward to it,” says one European central banking official. “Volatility is good because it keeps people on their toes. The world is risky. If you’re underpricing volatility, that’s bad.”

There’s also been significant volatility and price divergence even within the same asset class, as seen in U.S. tech. The so-called FAANG group of Facebook, Apple, Amazon, Netflix and Google stocks are on course for a rise of 20 percent in Q1, led by a 55 percent jump in Netflix.

But Facebook is down 14 pct, dumped by investors after it emerged that major data-privacy breaches allowed data of 50 million users to get into the hands of a political consultancy. Shares in the social network entered bear market territory as its shares slumped more than 20 pct peak to trough.

The opinions expressed here are those of the author, a columnist for Reuters.

Reporting by Jamie McGeever; Graphic by Marc Jones; Editing by Larry King

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