The most important one may be what’s going on in Washington. Historically, when political and policy uncertainty is elevated, volatility has been higher. Today’s low volatility seems to be implicitly suggesting that Washington will arrive at another last-minute deal when the budget skirmishes resume in January. Even if that proves to be correct, investors may be paying insufficient attention to another factor that could keep political uncertainty high: the fallout from the Affordable Care Act (ACA). Continuing problems associated with the rollout of ACA risk keeping policy uncertainty elevated and undermining consumer confidence, and by extension growth.
Low volatility has a way of persisting, until it doesn’t. In other words, volatility is likely to stay low until something jars investors out of their complacency. When exactly that will happen is unclear, but for investors there are a couple of things to consider.
More tactical oriented investors may want to consider strategies that allow them to “buy volatility,” potentially profiting from a possible spike. Everyone else may want to consider trimming their equity exposure or at least waiting for a better entry point before putting new money to work. This is because, while I continue to believe that stocks will be higher a year from now, with volatility so low, there’s likely to eventually be another spike.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Source: Bloomberg