CONTRIBUTORS
Edward D. Perks, CFA
Chief Investment Officer
Franklin Income Investors
Equity and bond markets react to uncertainties
April 2025 saw significant financial market volatility, primarily driven by policy and economic uncertainties. The Chicago Board Options Exchange’s Volatility Index (VIX),1 a measure of US equity market volatility, surged to levels above 50—a rare occurrence that, in the past 30 years or so, has only been seen during the global financial crisis in 2008 and the onset of the COVID-19 pandemic in 2020. This spike reflects a high level of market anxiety and uncertainty, which has led to a moderation in economic and fundamental performance expectations for companies. In our opinion, the market has been relatively complacent with substantial gains going into the end of last year, and thus pricing in high expectations, making the increase in volatility particularly pronounced. Declining consumer sentiment has also played a role in this uncertain and volatile backdrop due to questions about the path of tariffs, monetary policy and inflation.
The Merrill Lynch Option Volatility Estimate Index (MOVE),2 which measures US bond market volatility, also spiked in tandem with the equity market for the same year-to-date period. However, over the long-term, the MOVE’s rise is less pronounced than of the VIX’s, and its current level is more consistent with historical norms.
Tariff Policy Uncertainty Has Challenged Markets
Significant Increases in Market Volatility
December 31, 2024–April 24, 2025
Sources: FactSet, Economic Policy Uncertainty, Bloomberg, Chicago Board Options Exchange, Merrill Lynch. VIX Index is The Chicago Board Options Exchange Volatility Index. MOVE Index is Merrill Lynch Option Volatility Estimate MOVE Index. VIX, often called the "fear gauge," measures the market's expectation of 30-day volatility based on S&P 500 index options. MOVE Index tracks implied volatility in the US Treasury market, based on options pricing across various maturities (2Y, 5Y, 10Y, 30Y). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
Challenges and opportunities for equity investors
So far this year, market volatility has presented both challenges and opportunities for equity investors. The S&P 500 Index, which was up around 5% year-to-date in February, experienced a sharp decline to 15% in early April due to a spike in volatility and economic uncertainty. However, the market has since recovered about half of those losses, ending April down around 5% year-to-date.
This volatility has opened up opportunities in stocks that have been previously overlooked, as a narrow band of high-growth darlings has been driving a lot of the market’s performance. The MSCI USA High Dividend Yield Index—comprising what we consider high-quality companies with good balance sheets, attractive dividend yields and reasonable valuations—has shown resilience.3 Sectors hit hard by tariffs and a potential economic slowdown—such as information technology, energy, financials and health care—have presented what we consider attractive investment opportunities. Consumer staples and utilities, which are less impacted by tariffs, have performed well.
Dividend Payers Have Remained Resilient Overall
S&P 500 vs. S&P 500 Information Technology vs. MSCI USA High Dividend Yield
December 31, 2024–April 23, 2025
Sources: FactSet, S&P Dow Jones Indices, MSCI. The S&P 500 Information Technology comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector. The MSCI USA High Dividend Yield Index is based on the MSCI USA Index, its parent index, and includes large- and mid-cap stocks. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
Fixed income market evolution
Unlike the past five years when interest rates were low, rates have risen and are now more normalized. Thus, we believe that high-quality fixed income assets have a crucial role and offer a potential buffer to volatility. For instance, the 10-year US Treasury yield saw a substantial increase from around 3.99% to 4.49% between April 4, 2025, and April 11, 2025, coinciding with heightened market volatility and pressure on equity markets. However, yields have since stabilized to around 4.38% as of April 23, 2025, closer to the 200-day moving average4 of 4.23%, bringing stability back to core fixed income markets.
The high-yield bond market has also experienced significant changes. At the beginning of the year, spreads were near historical lows, making high-yield bonds less attractive to us. However, spreads quickly widened in April, and yields surged from the 6.5%–6.75% range in February to the 8.5%–9% range in April. In our analysis, this marked shift created what we consider attractive opportunities, particularly in companies with strong credit quality and the ability to refinance or meet upcoming maturities.
Yields and spreads react to ongoing trade tensions
Source: Bloomberg. The Bloomberg US Corporate Investment-Grade (IG) Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. The Bloomberg US High Yield Very Liquid Index (VLI) is a component of the US Corporate High Yield Index that is designed to track a more liquid component of the USD-denominated, high yield, fixed-rate corporate bond market.The Option-Adjusted Spread (OAS) quantifies the difference between the yield of an index that pays fixed interest payments over a risk-free interest rate, represented by US Treasury rates. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
Navigating evolving market conditions
In our opinion, employing a dynamic investment approach would help in navigating current market conditions and identifying attractive opportunities in equities and a broad range of fixed income sectors. As the market continues to evolve, we believe the ability to be nimble and flexible should remain crucial in achieving income objectives and managing risks effectively.
EndNotes:
- VIX, often called the "fear gauge," measures the market's expectation of 30-day volatility based on S&P 500 index options. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- MOVE tracks implied volatility in the US Treasury market, based on options pricing across various maturities (2Y, 5Y, 10Y, 30Y). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information. There is no assurance that any estimate, forecast or projection will be realized.
- The MSCI USA High Dividend Yield Index is based on the MSCI USA Index, its parent index, and includes large- and mid-cap stocks. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
- The 200-day moving average is a technical indicator representing the average price of an asset over a 200-day period.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
Equity securities are subject to price fluctuation and possible loss of principal.
Focusing investments in health care- and information technology-related industries carries much greater risks of adverse developments and price movements in such industries than investments in a wider variety of industries. Securities issued by utility companies have been historically sensitive to interest-rate changes. When interest rates fall, utility securities prices tend to rise; when interest rates rise, their prices generally fall.
Diversification does not guarantee a profit or protect against a loss.
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