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
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[ 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.
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