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The S&P 500 fell 3.3% last week, erasing January’s gains to finish the month down 1.1%, the worst start to a year since 2016. Volatility spiked, with the VIX rising 11 points to 33 last week, the biggest weekly increase since June 2020. Economists at UBS think that the volatility reflects market positioning, not concerns over the economic recovery, and see further upside for risk assets.

Key quotes

“While some price movements in individual stocks last week appear difficult to justify based on fundamentals, the broader sector rotation behind the trend has been going on since the first positive vaccine news in early November. Investors rotated away from the stay-at-home beneficiaries of 2020 into the pandemic’s laggards and more cyclically exposed areas. We believe this trend has further to run. In particular, we highlight opportunities in emerging market stocks, led by China, and global small-caps, which are more economically sensitive than US large-caps.”

“While positioning and flows can add to near-term volatility, they are not the fundamental drivers of the markets over the medium-term. The macroeconomic policy and earnings outlook, set against a backdrop of widening vaccination efforts points to further equity upside. We retain a risk-on stance and recommend investors use volatility as an opportunity to add medium-term exposure to risk assets.”