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The Return Of Volatility (Part 2)

Mar. 03, 2018 6:16 AM ETSPY, VOO, IVV, USDU, UDN, UUP, VXX, GSG, DBC, TLT, IEF1 Comment
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  • Across a number of metrics, volatility has turned up from ultra low levels.
  • Ultra low volatility has been seen across asset classes, and volatility has become more synchronized across asset classes in the past 10 years.
  • The changing global macro backdrop will reinforce a transition to higher volatility across asset classes as the business cycle matures and the tides turn in global monetary policy.

A few weeks ago I wrote an article called "The Return of Volatility" in the midst of the February stock market correction. I highlighted the prospects of a change in market regime from one of ultra low volatility to a period of higher volatility. My view remains that we will likely see a sustained period of higher volatility for stocks, but due to a number of positive dynamics, it may well be more similar to the late 1990s than the pre-financial crisis period. In other words, rising volatility with rising stocks.

Now that's just looking at one asset class - stocks, or specifically the S&P 500. But what about other asset classes? Curiously, this period of ultra low volatility for equities has been mirrored across the major asset classes. The second chart in this report shows how realized volatility for the US dollar (the DXY), commodities (GSCI Commodities Index), and the US 10-year government bond yield has dropped to very low levels. In fact, there seems to have been a synchronization in volatility across asset classes.

But as I outlined in the presentation, "Monetary Policy and Asset Allocation", as the global economic cycle matures, the tides are turning for global monetary policy. This is going to be a key driver of higher volatility across asset classes in the months and years to come. Monetary policy (traditional and extraordinary policy tools) was a force for volatility suppression over the past 10 years, and now that is changing.

The key points on the transition to a higher volatility regime are:

  • Stock market realized volatility has turned up from ultra low levels.
  • Ultra low volatility has been seen across asset classes, and volatility has become more synchronized across asset classes in the past 10 years.
  • Implied volatility has likewise turned up from ultra

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Comments (1)

Interesting in the first chart is that just before the red line spikes there's a tiny jump, but once that subdues the big spike is coming. Coinicidence? We'll find out the hard way I guess.

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