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Volatility has returned and if it seems like a jarring wake up; blame it perhaps on a market that lulled investors into a deep sleep.
By nearly any measure, stocks enjoyed one of their most tranquil periods in history between 2013 and 2017. A byproduct of the lullaby market is that many investors came out of it groggy and have been slow to react to the more normalized volatility regime that emerged last year. The good news: there’s still time to respond.
October 25, 2018
361 Team
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.
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.
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.
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.
November 09, 2017
361 Team
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!
Michael Santoli pointed out recently that if the current lack of volatility holds through December, the market will print a new record for the number of days without a 5% move. While it is true that on the surface the volatility of the market has been very calm, under the surface there have been several strong currents.
A week ago, doom and gloom headlines abounded as the VIX Index spiked 46% and the S&P 500 Index crashed, falling a panic-inducing 1.79%! Hopefully, my sarcasm is evident, but in case it’s not – I am being sarcastic. It is always amazing to me how recent market behavior can influence our psychology, and usually not in a positive way.
Much ink has been spilt of late ruminating on the cause of the low volatility environment in which we find ourselves. Indeed, on May 8th the VIX closed at its lowest level since December of 1993. Curious to be sure, given the laundry list of geopolitical and market related concerns facing investors. And while searching for the cause could be instructive, the fact is that volatility will not remain at these levels and investors need to prepare for a return to something resembling normality at some point in the not too distant future.
Why do we continuously preach the virtues of lowering portfolio volatility? Well, aside from the fact that our funds are made to do just that, consider this from the Mutual Fund Observer:
“There are funds that still haven’t recovered their October 2007 levels. We screened the MFO Premium database, looking for funds that have spent the past 101 months still mauled by the bear. We’ve found 263 funds, collectively holding $507 billion in assets, that haven’t recovered from the financial crisis. Put another way, $10,000 invested in one of these funds 3,150 days ago in October 2007 still isn’t worth $10,000.”
*Source: CBOE. Data through 12/31/2017. Historical data from 1990-2017.
**Source: Commonfund.
†Source: US News and World Report
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