Page 9 - ISQ UK_October 2017

OCTOBER 2017

Low Volatility:

All Quiet on the Market Front?

Kristin Byrnes, Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions and
Peter Greenberger, CFA, CFP, Director, Mutual Fund Research & 529 Plan Product Management
®
share their thoughts on a prolonged lack of volatility and its effects on the market.

The equity markets are the quietest they’ve been in nearly half a century, prompting industry pundits and investors alike to
question why this might be and what it means for the markets going forward. By “quiet,” we are referring to a lack of volatility,
namely the degree to which markets fluctuate (either up or down) on a daily basis. Generally, more volatile stocks and market
indices are perceived to be riskier.

CONVENTION OR CONUNDRUM? PASSIVE INVESTMENTS
While volatility levels are by no means ‘normal’ from a historical Inflows to passive investments have been on the rise for years now,
standpoint, it doesn’t necessarily mean they are unwarranted or as longer-term investors seek out lower-cost, tax-efficient, and
unprecedented. Keep in mind that volatility doesn’t drive the diversified investment strategies. Index-based strategies allocate
markets; rather, it is merely a byproduct of the market’s actions. assets in proportion to the index, irrespective of individual security
Understanding the current environment helps to explain this state of analysis. Additionally, increased automated trading by computers
complacency. and algorithms has reduced the volume of trades marred by human

MEASURING MARKET VOLATILITY
The Chicago Board Options Exchange Volatility Index (VIX), commonly referred to as the investor “fear gauge,” measures the market’s
expectation of 30-day volatility for the S&P 500 Index. It recently neared its lowest level ever, and recent trading has been among the
quietest in history.

CBOE VOLATILITY INDEX (VIX) AVERAGE VIX LEVEL OVER TIME
80
VIX Level
70 28 19.5
Long-Term Average
60 10 20.5
Index Level 50 Time Period (years) 5 14.8

40
30 3 15.1 LONG-TERM
AVERAGE
20
1 12.4
10
0 0 5 10 15 20
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average VIX Level
Source: St. Louis Federal Reserve and Raymond James

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