By April Joyner
NEW YORK (Reuters) – Investors are bracing for more turbulence in U.S. stocks, as some states prepare to reopen their economies and global trade tensions rise.
The Cboe Volatility Index <.VIX>, known as Wall Street’s fear gauge, is set for its biggest weekly gain in about two months, reflecting a sell-off that has taken the S&P 500 index down nearly 4% from its April 29 high. VIX futures have jumped as well, with investors now pricing elevated risk into June contracts.
Whether the recent losses in stocks are a bout of profit-taking after April’s swift rally or the start of a prolonged decline may become more apparent in the weeks to come, investors said.
Many are keeping a close eye on the progress of U.S. states seeking to reopen their economies without fueling a fresh rise in coronavirus cases. Parts of New York, Virginia and Maryland moved toward lifting lockdowns on Friday, and Connecticut and Minnesota are set to ease restrictions in the coming week.
“We don’t know what the new normal will be,” said Alessio de Longis, portfolio manager at Invesco. “The managing of expectations will lead to some false steps along the way.”
For now, a pile-up of worrying domestic and international news appears to have given investors a reason to pull back on equities after the S&P 500 notched its best monthly gain in decades in April.
U.S. President Donald Trump has ratcheted up rhetoric on China, floating the possibility of cutting ties with the world’s second-largest economy. The White House on Friday moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, which could put pressure on a global economy already suffering its deepest contraction in decades.
Hopes for a speedy return to normal took another hit when California’s state university system canceled classes for the fall semester because of the coronavirus and Los Angeles County said its stay-at-home order was likely to be extended by three months.
“What we’re seeing now is the wash of realism coming over the market,” said Shannon Saccocia, chief investment officer at Boston Private.
The VIX on Monday touched its lowest level since late February before reversing course as expectations for market volatility grew later in the week.
Concerns over economic reopening are also being reflected in the VIX futures curve, which now shows investors betting that volatility will be elevated in coming weeks, rather than later in the summer, said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
Prior to that, the curve had briefly returned to a more historically common pattern, with front-month VIX futures
Several investors are now positioning for further turbulence by shunning value sectors such as energy and financials in favor of technology and healthcare, two areas that have held up relatively well during the recent market turmoil.
Andrew Graham, managing partner at Jackson Square Capital in San Francisco, has focused on stocks he believes can maintain high dividend yields, especially within the pharmaceutical industry. His firm owns shares of Bristol-Myers Squibb Co
Investors will also be watching the Treasury Department’s first auction for its 20-year bond on Wednesday. The department plans to borrow a record amount of nearly $3 trillion this quarter.
Some investors said they are likely to keep equities at a slight underweight in their portfolios given the likelihood of further market declines.
Dave Lafferty, chief market strategist at Natixis Investment Managers, believes the recent stock rally did not factor in the likelihood of businesses operating below their usual capacity even if states reopened their economies.
“Yes, there’s going to be a strong growth rate from the bottom, but the place we’re getting back to is going to be subpar for a while,” Lafferty said. “Are stocks priced for subpar growth? I think they aren’t.”
(Reporting by April Joyner; Editing by Ira Iosebashvili and Cynthia Osterman)
