Even though global equities markets limped into the close Tuesday, there’s no need to ring the alarm bells just yet.
That’s the take of Alec Young, managing director for global markets research at FTSE Russell. Young told TheStreet that, despite political turmoil in Europe, this nine-year old bull market isn’t going to die on a little geopolitical uncertainty.
Young said that the recent return of volatility to U.S. stocks has been shock when compared to record-low-volatility 2017, but it’s nothing more than a move to historical averages. When taken in the context of the last decade instead of the last 12 months, current volatility levels are far from elevated.
But still, market reactions to political unrest in Italy and Spain, for example, have weighed on stocks. According to Young, international concerns can more negatively impact large-cap stocks than they can small-cap stocks.
“They have less overseas exposure than their large-cap counterparts,” Young said of the likes of the small-cap focused Russell 2000, which has easily outpaced the narrow gains of the broader market since the start of the year.
Regardless, “The fundamentals still look solid for U.S. equities,” Young said. Any recent selloffs or significant volatility spikes are a result of investors flocking to safe haven assets as a reaction to newfound risk aversion, not poor fundamentals.
“The most logical conclusion I think is that investors are concerned there is a potential path to a pretty negative outcome in Italy. That doesn’t mean that it’s likely. I think it’s probably nine to 10 times more likely that something less negative happens. But just the fact that the risk is now on the table is going to be a little bit of an overhang,” Young said.
The elections in Italy continue to be a source of unrest in the European Union, with many political pundits this week characterizing the elections as a referendum on Italy’s EU membership. Italy has effectively been without a government since March, and the country appointed former International Monetary Fund official Carlo Cottarelli as interim prime minister this week. Italy is the euro zone’s third-largest economy, meaning a significant downturn in the country’s markets could have a ripple effect throughout the European Union.
But that doesn’t precede a battle cry for Wall Street, Young said.
“One of the reasons that stocks have been so resilient in the face of all these macro issues is the fact that the corporate environment is very healthy. There’s no reason to think that we’re not looking at continued increases in corporate earnings as the quarters continue here,” Young added.
“It’s actually very helpful that a lot of these global macro headline risks are coming at a time where the domestic fundamental picture is healthy,” Young said. “It makes it easier to handle a lot of these potential macro risks.”
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