United States

Equities look for bottom, investors a break from volatility


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It had been 588 days since equity markets had declined by 5 percent. The last time was the day Great Britain voted itself out of the European Union. Each day since Feb. 2 has been a new adventure in volatility.

In our estimation, equity valuations had been stretched thin by any margin. Our preferred indicators—Tobin’s Q and the cyclically adjusted price-to-earnings ratio for the S&P 500—both strongly implied that a correction was in order. From our point of view, the punishment of excess risk taking and speculators, especially in the short volatility trade, was long overdue and is a major step on the road to a healthier market and more sustainable valuations. That being said, equity volatility has not impacted the real economy in a material fashion and requires no shift in the path of rate and balance sheet policy out of the Federal Reserve. We have not changed our call on growth, employment and monetary policy despite the declines in valuations across equity markets.

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