U.S. small companies that derive the majority of their revenues within the U.S. are somewhat insulated from the gyrations of the Chinese market and oil prices crumbling. As a barometer for U.S. Small-cap companies, the Russell 2000® Index is down -12.24% year-to-date (based on close 1/20/16).
According to Bloomberg’s latest Monthly Survey Table of U.S. GDP Forecasts (1/14/16): The range of GDP forecast was Low = 0%, High = 3.7%, and Average = 2.4% (83 economists surveyed)
Recently the IMF released their latest World Economic Outlook (WEO) on January 19, 2016. Here are some excerpts…
“Overall activity remains robust in the United States, supported by still-easy financial conditions and strengthening housing and labor markets. But there are also challenges stemming from the strength of the dollar, which is causing the U.S. manufacturing sector to shrink marginally”
“The WEO Update now projects global growth at 3.4% this year and 3.6% in 2017.”
Considered a gauge for measuring fear in the market, the CBOE Russell 2000 Volatility Index (RVX) climbed from 18.32 to 30.20, a +39.34% move (12/29/15 – 1/20/16). RVX appears to be approaching levels seen during the sell-off last August (RVX at 39.63).
The markets may not always behave rationally and the question is are we heading for a recession or not?
Without a pending recession, RVX which measures the market expectation of 30-day volatility implicit in the prices of near-term Russell 2000 Index options are relatively high and would be expected to revert towards the mean. In 2015, the RVX average was 19.39. Strategies to benefit from declining volatility implied volatility include RUT option spreads i.e. selling Iron Condor, Butterflies, Straddles/Strangles, etc. Trading options/futures on RVX are also available.