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Volatility revisited

KEY TAKEAWAY

Because volatility can weigh on investment returns, investors need to think carefully about how they minimize the impact of market swings — in good times and in bad.

We’re not in 2011-2014 anymore. That was a period of unusual market calm, where volatility measures trended well below the long-term average. The first six weeks of this year, when the S&P 500 lost nearly 10%, was a clear reminder of that. Another came with the surprise “Brexit” vote on June 23, which sent markets into a tailspin.

Markets eventually calmed, as they inevitably do, but investors should be prepared for more bouts of volatility across countries and asset classes as myriad market risks play out.

VOLATILITY REMAINS A REALITYNumber of +/– 2% Daily Market Moves

Graph: Volatility remains a reality
Sources: BlackRock Investment Institute and Thomson Reuters, June 2016. Represented markets/indexes (left to right): Shanghai A Shares, Japan Topix, MSCI Europe, S&P 500.

To some extent, the Brexit vote removed an uncertainty, but the ramifications will continue to be processed as the U.K. lays out plans to exit the EU. There are also signs that anti-EU sentiment may be on the rise. Next among the sources of angst: one of the most polarizing U.S. presidential elections in modern memory. We also face persistent instability in the Middle East and questions around Russia and China’s assertiveness abroad while grappling with economic troubles at home.

A LONG LIST OF MARKET-MOVING UNKNOWNS

Graph: A long list of market-moving unknowns

Any or all of these can stoke volatility, which is more than unsettling. Our research suggests it can also hamper long-term investment returns. This reinforces the need to build downside protection into your investment portfolio.

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