For qualified investors

Rethinking risk

By BlackRock Investment Institute

We see low volatility as a normal feature of the benign economic and financial backdrop – and not as a warning sign in itself.

Richard Turnill, Global Chief Investment Strategist, explains the rethinking risk theme.

Much noise has been made around recent lows plumbed by volatility measures such as the VIX for the S&P 500 and MOVE for US Treasuries. For some, this calm is causing consternation: surely markets must obey the principle of mean reversion and volatility should march back to more “normal” levels? However, this popular line of reasoning features a flaw: markets are typically docile when the economic backdrop is benign.

Distribution of realised monthly US equity volatility, 1872-2017

US equity volatility

Sources: BlackRock Investment Institute, with data from Robert Shiller, June 2017. Notes: Realised volatility is calculated as the annualised standard deviation of monthly changes in U.S. equities over a rolling 12-month period. Bars show the number of months at each level of volatility. Each bar represents a bucket of two percentage points in realised volatility. For example, the bar marked 10–12 shows that volatility was between 10% and 12% for 369 months.

This isn’t to suggest complacency is warranted. Spikes in volatility happen with some frequency and present real risk for flightier investors. However, a sustained shift into a high volatility state may require a real growth scare or systemic financial threat. As neither looks imminent (at least as we parse the signals), dialling down risk in portfolios today may leave investors tilting at windmills.



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