Volatility soars as stocks tank

As global stocks tumbled last week, volatility soared to new highs worldwide (except in China). Friday’s slide in stocks dragged most indices even further down into negative territory, with major indices on track for finishing 2018 in the red.

The biggest performance loser so far is China. The Chinese index CSI 300 recorded a cumulative year-to-date loss of 21% last Friday, followed by FTSE Asia Pacific-ex Japan (-13%) and FTSE Emerging Markets (-12%)—which was not surprising, since China has a large impact on both of the other indices. In contrast, the Russell 1000 recorded the smallest year-to-date loss at about 1.8%.

Most major indices saw large increases in risk over the past couple of months. Despite its smaller year-to-date loss, the Russell 1000’s short-horizon risk took the lead, climbing about 9.5 percentage points since the end of September, reflecting big losses recently. The most current reading of Russell’s volatility at 17.5% now exceeds the long-term median of 13.6%. However, when looking at the historical data, risk in the US is still low compared with risk levels during the Global Financial Crisis.

China was the only region to record a slight drop in risk last week. In fact, China’s volatility has been declining since reaching a peak of nearly 25% in early November. That said, China is still the riskiest among the geographies Axioma tracks closely, followed by Emerging Markets and Japan. Feeling the pressure of Brexit anxieties, the UK saw the steepest climb (of about 180 basis points) last week, but it remained the second least risky after Canada.

The instability in the markets seems to be growing week after week. One of Axioma’s major concerns is the sudden and sharp increase in short-horizon risk in most countries and regions. Historically, at least in the US, we have observed that risk tends to climb well in advance of a market peak, and recent risk gains have crossed an important threshold. See Drawdowns Looming? It's Not in the Numbers... for more detail. For the most current reading of risk, see our daily Equity Risk Monitors.

Diana R. Baechle, PhD

As a member of Axioma's Applied Research Team, Diana R. Baechle generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Her research helps clients and prospects better understand and adapt to the evolving risk environment.