One of the more frequent questions we’ve been receiving from clients recently is related to the decline in market volatility and uncertainty that, at times, borders on complacency. At first, we were somewhat puzzled by the question because from our perspective there has been no shortage of volatility. And, as we discussed in our write-up from the 2015 annual secular forum, and still believe to be the case, we envision a period of increased market volatility over the next three plus years. So where is the disconnect?
The disconnect is that while equity market volatility (realized or implied) has trended lower throughout the year, we see a very different story developing in the bond and currency markets. This is evident in the data below, which shows rolling 10-day averages of the VIX, an estimate of short-term expected equity volatility, related to similar measures in the bond (MOVE) and currency markets (CVIX). Historically, these measures move together, but since the fourth quarter of last year, equity implied volatility has trended lower while bond and currency volatility have both trended higher.
The equity market has shrugged off uncertainty in Greece and is demonstrating relative indifference to the next stage in post-crisis central bank policy — one that will be marked by the largely anticipated Federal Reserve decision to increase rates for the first time in over a decade and the first time ever from a near-zero policy. This will also mark the beginning of the disconnect between the Fed and their central bank peers across the globe.
The Multi-Asset Solutions Team (MAST) anticipates that investors across all markets will ultimately see a pick-up in volatility. However, even with the Fed expected to move by the end of the year, it hardly creates an environment restrictive to growth. We remain modestly overweight equities relative to bonds across our strategies.