Trustnet Magazine 54 September 2019 | Page 18

Your portfolio Ellie Duncan attempts to find out what is a “normal” level of volatility for markets The new normal V olatility in markets fell to historically low levels in 2017, only to jump up again in 2018. In 2019, volatility has, so far, sat somewhere between the two. Since the financial crisis, stock market volatility has been fairly low compared with the period leading up to it – so what should we class as “normal”? “It’s no secret that markets have been through an unprecedented decade since the financial crisis, supported by extraordinary monetary policy, and asset prices have risen across the board,” says Rahul Srivatsa, portfolio manager and team leader, quantitative research at Fidelity International. “The last decade has been a relatively sanguine period overall, particularly compared with the years between the dotcom bubble and the financial crisis.” FE TRUSTNET 18 / 19 [ NORMAL VOLATILITY ] “The last decade has been a relatively sanguine period overall, particularly compared with the years between the dotcom bubble and the financial crisis” How volatile is normal? The question of “what is normal volatility?” was brought to the fore in 2018. In the preceding year there had been just eight days in which the S&P 500 had recorded intraday moves of 1 per cent or more, with a maximum drawdown (in dollar terms) of 2.65 per cent. Yet in the following 12 months there were 64 days in which the market moved by 1 per cent or more, with the index recording a maximum drawdown of 19.49 per cent. This spike in volatility caused investors to panic, even though industry commentators pointed out the market was simply reverting to normal levels after an unusually benign 2017. But were they right? For John Teahan, portfolio manager at RWC Partners, the answer is “no”, for the simple reason there isn’t a “normal” level of volatility. He pointed out that, put simply, volatility is the movement of financial markets in reaction to real or perceived risk. trustnet.com