The S&P 500 Index will end the year higher, but it’s going to take the winding road to get there, says one market strategist.
That’s because volatility returned to the market in recent weeks after abnormally low levels through last year. It should continue in the coming months.
“The volatility that we saw was elevated,” Christopher Harvey, head of equity strategy at Wells Fargo, told CNBC’s “Futures Now” last week. “We don’t think we’re going to stay at that high a level, but there is a bid to volatility at this point in time.”
The Volatility index (VIX) surged more than 100 percent on Feb. 5, its biggest one-day move ever, when the Dow Jones Industrial Average made a 1,175 point drop, its biggest point drop. And since the beginning of February, the Dow has moved within a nearly 3,000-point range and the S&P 500 a 300-point range.
Since then, the Dow has fallen 3.5 percent and the S&P 500 1.7 percent. Harvey sees more volatile moves ahead.
“Now the question is, where is that natural level? Is it at 12 on the VIX? Is it at 14?” asked Harvey. “We think it’s at mid-teens… As we look forward we think we’ll see a lot more spikes this year than we did last year.”
Those kinds of levels are par for the course in a normal year. But the return to normality has been a shock to the system for investors accustomed to 2017 levels when volatility was low and the waters were calm.
The VIX hit an all-time low in November, and dropped more than 21 percent in 2017. The S&P 500 moved by at least 1 percent just 8 trading days for the full year.
With volatility returning, Harvey says there are a few key levels to watch.
“In the near term we think 2,700 is an important level,” he said. “We’ve held that level pretty well,” and expects the benchmark to close the year above those records, he added.
Harvey has a target of 2,950 on the blue-chip index, implying a 10 percent increase for the full year and 6 percent rise from current levels.
As volatility returns to the market, Harvey does see one possible winner: Utilities.
“They’ve under-performed by about 20 percent over the last five or six months,” he said. “With the higher level of volatility bid, we think there’s going to be a bid for risk-aversion longer term so that’s an emerging theme for us.”
The Utilities XLU exchange-traded fund (ETF) is on track for a small gain in March after losses of at least 3 percent in each of the previous 3 months. The ETF saw around half the gains achieved on broader markets in 2017.