• Uncertainty in the Markets  

    Uncertainty in the Weather and Markets

    October 25, 2018
    361 Capital

    The Fall has ushered in both unpredictable weather and unpredictable volatility. While protection from adverse market events is best if in place prior to volatility spikes, it’s not too late to batten down the hatches.

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    The only thing different about spikes in volatility this year might be the shorter time investors have to capitalize on them. Volatility has often risen sharply following unusually calm markets, but over the past decade the time in which the VIX reverts to normal levels after a spike has been shrinking.

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    We have talked about the VIX Index before, and have shown that it is predictive of future VIX levels, but is it predictive of future equity returns? First, we’ll see if there is a relationship between the VIX and S&P 500 price returns on the same day. The below analysis uses data from 1/1/1990 through 3/31/2018, with both daily and monthly periodicity.

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    With all the talk of the current low volatility environment and a large portion of people implying mean reversion is imminent, we thought we would weigh in further on the topic.

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    Investors, and the media alike, have been sounding the alarm about the “unprecedented” low levels of volatility that U.S. equity markets have experienced this year. Either implicitly or explicitly, the over-arching theme is that volatility is cheap, it can’t go lower and it makes no sense…so we must be on the precipice of another 2008. After all, the last time volatility was this low was 2006/2007 and since we know what happened in 2008, watch out for 2018!