HQ TrustNovember 23 2020

HQ Trust – Chart of the Week “Stock markets like uncertainty”

2 mins read

Written by Maximilian Kunz, HQ Trust

It is clear that investors do not like uncertainties on the stock markets. After all, they are incalculable and make it difficult to react correctly. But is this assumption correct at all? Maximilian Kunz of HQ Trust has done the math.

For his analysis, the Senior Analyst evaluated the average logarithmic excess return of the S&P 500 over different future periods with two rising and falling “fear barometers”: The CBOE Volatility Index (VIX) expresses the expected range of fluctuation of the S&P 500, while the US Economic Policy Uncertainty (EPU) Index provides information on the extent of economic uncertainty in the United States. Maximilian Kunz used data from the past 30 years for his study.

  • “If the risk on the equity markets falls, the S&P 500 rises above average, whereas the opposite is true in the case of economic uncertainty.
  • “The longer the period considered in the future, the clearer the results: At 10 days, the outperformance of the S&P is on average 0.19 percentage points when the VIX is falling – at 100 days it is already 1.85 percentage points.
  • “On the other hand, if the uncertainty increases and the VIX rises, these figures are -0.13 percentage points (10 days) and -1.26 percentage points (100 days). “
  • “The situation is quite different when it comes to economic uncertainty: If it falls, the stock index is 1.02 percentage points below its historical average over the period, on average over 100 days. If it rises, it is plus 1.16 percentage points.
  • “Investors seem to take a positive view of negative economic data as they expect central banks to intervene and decide on further easing”.

In addition to the market-wide S&P 500, Maximilian Kunz also calculated the different reactions for all S&P sector and factor indices:

  • “The different reaction between rising and falling risk for VIX and EPU can be observed in all S&P sector and factor indices without exception. However, this reaction is differently pronounced”.
  • “High beta, IT and pure growth react particularly strongly to rising or falling uncertainty. “
  • “Utilities, basic consumer goods and the low volatility factor are the least affected by changes in uncertainty.

The classification of the indices into “rising” or “falling” is based on the average values of the past 20 and 50 days: If the value is higher than 50 days, the index rises. On the other hand, if the 50-day value is lower than that of the previous 20 days, the index falls.

Disclaimer: Investment in the capital markets involves risks and in extreme cases can lead to the loss of the entire capital invested. Past performance is no indicator of future performance. Forecasts are also not a reliable indicator of future performance. The presentation does not constitute investment, legal and/or tax advice. All content on our website is for information purposes only.