Rejoice! Volatility is back again

IComment t’s been a scary couple of weeks. Headlines have been blaring about the stock sell-off, which has seen the S&P 500 fall back to levels not seen since — egad! — December 2017. Even worse, the big bad wolf that seemed to have been forever banished has now come back with a vengeance: volatility. It has wiped out (a handful of pretty small inverse) exchange-traded securities and investors (who were short volatility through complex options strategies).

Even for the rest of us, it can be pretty unsettling to watch your portfolio go up and down like the proverbial toilet seat every day. But how unsettled should we be?

Technically, volatility is a measure of the dispersion of returns over a given period. In practice, it reflects the degree of certainty among market participants on the right price for an asset. Low volatility suggests investors are in high-certainty mode; high volatility suggests they don’t know what the hell is going on. At least compared with earlier sell-offs, it looks like markets have earned the don’t-know-what-the-hell-isgoing-on tag in spades.

On Feb. 5 — let’s call it Manic Monday — the S&P 500 stumbled toward a five per cent decline. But the CBOE Volatility Index — a.k.a.theVIX,a.k.a.thefear index, but more accurately a.k.a. the uncertainty index — surged more than 115 per cent. That was the biggest rise in the VIX in decades.

As Richard Turnill, global chief investment strategist for asset manager BlackRock, has pointed out, the one-day change in volatility relative to the actual change in the S&P 500 was unprecedented — a much bigger move than occurred during the 2016 Brexit vote or the 2008 financial crisis.

So yeah, volatility is a thing again — but some perspective might help.

One point is that volatility is the norm, not the exception, and the noise around its recent return at least in part reflects how weird things were before. Before this month, the VIX had been hovering at or surpassing all-time lows as stock markets hit new records — a state of being that was lucrative, unusual and boring all at the same time. In some ways, the February spike in volatility is a measure of how complacent the faith in everrising indexes had become.

Now that faith is being tested — but how sorely, really? Since its Feb. 5 spike to above 50 (briefly), the VIX has settled into the mid20s. The historical average isaround20.Somaybethis isn’t the new normal. Maybe it’s just the same old normal we’ve collectively forgotten.

It’s probably also worth remembering volatility isn’t bad for everybody. Some players benefit — the big financial institutions could see a pickup in trading businesses, which make money off markets on the way up or down. Stock-pickers tend to do well during higher-volatility periods even as indexes tend to move sideways, which must be something of a relief after they’ve suffered through years of a rising tide lifting all boats. But for those of us who aren’t Goldman Sachs or Warren Buffett, maybe there’s comfort in thinking about it this way: Markets should be volatile right now, because some uncertainty is required.

Look at the big picture. Stock investors have enjoyed nearly a decade of incredibly low interest rates and monetary stimulus, but now policy-makers are whittling away the crutches. By most measures, the global economy is strong, corporate earnings are solid and maybe both can at long last stand on their own — or maybe they can’t. That’s just one uncertainty. Another is policy in the world’s largest economy, which may (or may not) disrupt global trade, enlarge U.S. government debt by trillions of dollars, spark rampant inflation, spur the Federal Reserve to hike interest rates faster than anyone expects, and hasten the onset of recession.

Who knows? Thanks to U.S. President Donald Trump, who fired Janet Yellen, there’s uncertainty over the new Fed chair, Jerome Powell. So far, he’s been singing from Yellen’s song sheet on the steady pace of rate hikes, but markets will likely be jittery over his comingout party — the next Fed meeting, at which he’s expected to raise rates. (Volatility-watchers should circle March 21 on their calendars.)

In short, the world is more uncertain than it used to be, and so is the stock market, so volatility is back. So what else is new?