The Top 3 Questions on the Minds of Advisors

By David Lebovitz via

Where has all the volatility gone? Why does valuation matter, and where is the value today? Where will Fed policy take us in 2018?

Volatility went missing earlier this year, leading investors to question not only what has driven this decline, but whether these very low levels of volatility are an indication that markets are due for some turbulence. We believe that today’s low levels of volatility can be explained by a number of different macro trends, and is not necessarily a signal that correction is imminent.

First, years of easy monetary policy has led to a decline in macroeconomic volatility – in other words, economic indicators have not been as noisy. This, along with policymakers who have kept one eye on financial stability, has pushed equity market volatility lower.

Second, realized volatility – for which we have a far longer time series than implied volatility as measured by the VIX – has fallen to levels only seen three times over the past sixty years: the 1960s, the 1990s and the early 2000s.

Third, correlations between individual equities have declined, as stocks trade more according to their fundamentals, rather than broad risk-on/risk-off macro developments. And finally, the proliferation of exchange traded products has made it very easy for investors to go short volatility, boosting the amount of income their investment strategies generate while pushing implied volatility to artificially low levels.

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