Stock price volatility at an all-time low

In July, a positive mood prevailed in the stock markets on average, as com-panies reported their Q2 earnings. In the US, an average earnings growth rate of +10% was seen, with many companies beating market forecasts. In both Europe and Finland, earnings growth has been slightly more moder-ate in relation to expectations, and in particular companies falling short of earnings forecasts has led to a decline in the prices of individual stocks. Re-gardless, general price volatility in the Western stock markets remains at an all-time low. All in all, economies are still showing favourable development, and major economic areas are not cur-rently showing signs of a downturn. In the US, stock prices rose by more than 2% in July, but the simulta-neous weakening of the dollar ate into euro investors’ profits. In Europe, the main equity market indices remained practically stagnant in July. We contin-ue to maintain a neutral equity market weight in our allocation, but we slightly reduced the weight of European stocks in July.


– Fixed income: We will maintain fixed income at neutral weight.
– Equities: We will maintain equities at neutral weight.
– Alternative investments: We will maintain alternative investments at mod-erate overweight.

Interest rates varied in a narrow band after the surge at the end of June. The ECB’s message has not changed signifi-cantly – the amount of stimulus within the current bond purchase programme will be put under scrutiny towards the end of the year. We expect the interest rate level to have bottomed out in the euro zone, alt-hough interest rates do not currently show any signs of a dramatic or rapid rise. Infla-tion still continues to be subdued in the euro zone, with the latest inflation rates in the German states at around 2 per cent. Market pricing for the 5-year period start-ing in 5 years is still only 1.58%, i.e. mark-edly below the ECB’s longer-term target. In the US, interest rates also see-sawed moderately during summer. We expect the Fed to announce the schedule for reducing its balance sheet by the end of this year. However, this operation is likely to have only a small impact on the US government bond market, because it is likely that the Fed’s balance sheet re-duction will span quite a long period of time after the earlier balance sheet stimu-lus operation. Demand for corporate bonds con-tinues to be strong and credit risk premi-ums are still at their tightest levels in Eu-rope during this cycle.

The Q2 earnings season was strong. Price volatility in the US stock markets was historically low during the past two weeks of July. Since the option markets took off in the beginning of the 1980s, daily occur-rences of less than 10 points in the VIX index have not been this frequent. Price volatility will certainly increase as autumn progresses, especially with the Fed an-nouncing in more detail when and how much it intends to reduce its balance sheet possibly already in September. The size of central bank balance sheets and risky asset classes have correlated fairly clearly in the wake of the financial crisis.

The corporate earnings season as such has been relatively successful. In the US, the earnings of S&P 500 companies rose by around +10% on average during the second quarter and many companies showed earnings growth rates in excess of market forecasts. However, as always, companies are cautious with their guid-ance for the remainder of the year. In Eu-rope, Stoxx 600 companies had a good Q2, showing year-on-year earnings growth rates of approximately +13%. Earnings growth has been supported by global economic growth, rising interest rates and increasing raw material prices. No major shift can be expected in these areas in the foreseeable future.

Juhani Lehtonen, Head of Fixed Income & Market Strategy Investment Solutions

Market Outlook of August (PDF)

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