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Rothschild Perspective: Understanding Recent Market Volatility

What happened:

After an extended benign period for stocks, volatility has raised its ugly head during the past week, sending equities sharply lower. In a matter of days, the S&P 500 Index has fallen approximately 8% from its high.

The decline gained steam on Friday, February 2, following a Labor Department report revealing that average hourly earnings rose 2.9% year-over-year in January, the largest increase since the end of the recession in 2009. While the absolute magnitude of the rise was not astronomical, it was larger than expected, given that up until this point, the economy had added jobs for 87 consecutive months without a meaningful uptick in wages.

There is some evidence that automated trading may have increased the magnitude of the sell-off despite an absence of major economic news. By some estimates, quantitative trading accounts for as much as 90% of market volumes, so the unwinding of short-volatility positions may have magnified losses, particularly as the VIX jumped from low double-digits to a reading of 50. In addition, the recent synchronization of global growth may have proven a double-edged sword, as investors globally took profits in unison.

What it means:

Although market declines are not taken lightly, we believe that the fundamentals are still intact. GDP growth remains solid, but not at overheated levels. This is a very different event from the market decline in early 2016, when fears of a recession were in play. And while wage inflation bears watching, even labor markets may have some elasticity, as labor participation rates remain approximately 3.5% below where they stood a decade ago.

Although corrections can elevate investors’ vital signs, they can actually be healthy after extended run-ups in market indices, as they rein-in valuations and allow the market to consolidate its gains. We have also seen sudden corrections before, such as when Dow futures fell 800 points overnight following an unexpected Trump victory in the presidential election, only to rebound sharply when the market reopened.

Looking forward:

It is also possible that recent declines could make certain stocks or sectors more attractive than others. According to FactSet, more than 80% of S&P 500 companies that have reported fourth quarter results have beaten analysts’ revenue expectations. While not baked into fourth quarter 2017 results, it is further expected that the tailwinds provided by tax cuts will further boost earnings going forward. Finally, after the recent decline, JP Morgan estimates that the S&P 500 now trades at 16x forward earnings. We remain constructive on the market as a whole and will continue to look for stocks with relatively attractive earnings and the potential to exceed expectations.

Disclosures

This commentary is for informational purposes only and is not intended to and does not provide a recommendation with respect to any security. It does not constitute an offer, or a solicitation of an offer, to buy or sell any securities, and it does not take into account the financial position or particular needs or investment objectives of any individual or entity. Nothing in this commentary constitutes, or should be construed as, accounting, tax or legal advice. The information contained in this commentary was obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. Statements regarding future prospects may not be realized, and past performance is not necessarily indicative of future results. Any reference to an index is not intended to imply that our investments are equivalent to the index in risk. The information and opinions contained in this commentary are subject to change without notice. This commentary has been prepared for Rothschild Asset Management institutional clients. Nothing in this commentary should be construed as an offer, invitation or solicitation of an offer to invest in a fund or strategy managed by Rothschild, to purchase any security or to engage in any other transactions. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

CRN: 2018-0209-6411 R

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.