Volatility: Low Now, But…

Written by: Global Thought Leadership
7 February, 2020

Chart courtesy of QS Investors. Source: Bloomberg, 1999 – 2019. Global Economic Policy Uncertainty Index with Current Price GDP Weights. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Chart

The chart shows, from 12/31/1999 – 12/31/2019, the month-end values of the Global Economic Policy Uncertainty Index and the Chicago Board Options Exchange (CBOE) Volatility Index, commonly known as the VIX.

The Bottom Line

  • Consumer demand and low interest rates have been linchpins of economic growth in recent years, buttressing financial markets while helping to keep a lid on volatility.
  • Yet at the same time, global economic policy uncertainty has skyrocketed, which in principle suggests there are reasons for investors to worry, and with that, the potential for higher volatility down the road.  
  • As shown above, that’s largely how things played out until the end of 2015, as volatility (as measured by the VIX Index) and policy uncertainty mostly rose and fell in tandem.
  • But since then, the two have diverged dramatically—with the difference between them now near a record high.
  • This anomaly suggests that a convergence could follow—with volatility picking up if investors conclude that further trade talks, post-Brexit negotiations and other geopolitical tensions pose a threat to financial markets.
  • QS Investors sees strategic allocation to low volatility equities as an important way to prepare for that potential before it happens—by diversifying from high beta stocks into defensively oriented sectors with stable sources of income.

Definitions:

Beta measures the sensitivity of an investment to the movement of its benchmark.  A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.

"Brexit" is a shorthand term referring to the UK vote to exit the European Union.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.

The Global Economic Policy Uncertainty Index is a widely followed poll designed by three US economic professors, tracking the frequency of newspaper articles that contain a trio of terms pertaining to the economy, policy and uncertainty.  It can include broad economy-wide conditions and specific economic conditions of a particular industry.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

  • Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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