- Investors have enjoyed an unusual period in recent years in which both major domestic equity and fixed income markets have generated competitive returns while volatility has been low. For example, U.S. equity indexes touched record highs once again this week while credit spreads across both investment grade and high yield bond markets have slowly declined since February 2016.1,2
- The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX Index, which measures expected equity volatility, reached its lowest point in more than 35 years this week.3 As the Index’s 50-day moving average highlights, equity market volatility has been on the decline since approximately March 2016.3
- Volatility within the fixed income markets has also trended lower, and has recently done so more steeply than the equity market. The Merrill Lynch Option Volatility Estimate (MOVE) Index is a yield-curve weighted average of expected volatility within the bond markets. It has been moving lower since April 2015, but has slid sharply this year.3
- While many investors and financial advisors have become accustomed to generating positive returns through relatively placid market environments, history has shown that volatility can spike quickly and for a variety of reasons.
- It is within environments like today’s that investors may consider preparing for potential changes. When volatility rises, it may be beneficial for investors if the assets within their portfolios display low correlations to the broader market and behave differently from each other.
1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Bank of America Merrill Lynch U.S. Corporate Master Index; Bank of America Merrill Lynch U.S. High Yield Master II Index.
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