“A degree of volatility is okay. The market sorts things out eventually.” This was the response of the IMF’s Christine Lagarde when asked about market turmoil at January’s gathering of world leaders in Davos. Investors in current markets might be forgiven for thinking otherwise. The opening months of 2016 witnessed a brutal fall in risk assets as sentiment soured and concerns around Chinese growth bled into equities, bond markets, commodity prices and currencies. Within equities the result was a stumble into bear market territory for many of the world’s major indices. For the year to 15 February, the S&P 500 returned -7.3% while Japan’s Topix was down 22.7%. Germany’s DAX fell 16.5%, the Dow Jones Asia-Pacific returned -14.3%.[1]
Against this background, commentators have been keen to highlight the “volatility” of markets. But this is somewhat misleading, at least if we take the VIX index, a popular proxy for volatility, as the benchmark. [2] For, despite the wide-ranging sell-off across asset classes, the spillover into the VIX (often known as the ’fear index’) from these price declines has been limited. January data illustrates the point. Even though the S&P 500 had its worst month in January since 2011 – and even though the VIX jumped 42% in the same month – the index is still well below the level it reached during a China-led sell-off in August 2015 where it climbed above 40 (See Figure 1). [3]
When seen in the longer historical context, though, even the 2015 China spike in volatility pales into insignificance. Figure 2 represents the VIX between 2008 and 2016 with the highest volatility spike to be found in the immediate aftermath of the global financial crisis where the index reached 80 – around double even 2015’s peak. More to the point, in the years since the financial crisis, volatility has peaked above 40 not once but three times. Risk assets may be out of favour, China may be slowing and equities may be suffering – but for all the talk of financial meltdown, it seems, we may still be a long way from financial Armageddon…
[Source: Citywire.co.uk – Author: Gerald Rehn, BNY Mellon Investment Management – March 3, 2016]
