Global Allocation Insight

Volatility makes its mark on equity markets

Feb 20, 2018

…but fluctuations of this magnitude aren’t likely to stick around.

The recent bout of market volatility was abrupt and severe, but the good news for long-term investors is that these swings appear to be exaggerated and do not reflect any deterioration in the steady economic growth that has supported the broader ascent of risk assets. As we’ve seen many times in the past, this episode of higher volatility was driven by technical factors – in this case, resulting from the unwinding of extremely crowded trades centered around bets on (ironically) low volatility – rather than a seismic shift in investor sentiment.

Given stretched valuations on the back of a nine-year bull market, and the impact of investors getting increasingly creative in their strategies in the low-rate, low-volatility environment, the ultimate breaking of the market’s calm comes as no surprise. But the VIX recently spiking north of 30 is unfounded given the otherwise benign financial market conditions and solid economy, which are suggestive of levels in the mid-teens.

The magnitude of the rise in volatility is unlikely to last

The CBOE VIX Index is a measure of implied volatility of the S&P 500 Index. From 1990 to present, the level of the VIX has averaged near 19 and exceeded 30 less than 8% of the time.

The magnitude of the rise in volatility is unlikely to last

Source: Bloomberg. Weekly data from January 1990 through February 2018.

As the dust settles, it is important for investors to remember that broad macroeconomic fundamentals continue to appear sound across most of the world. Additionally, the recent selloff was largely confined to equities, where increased risk taking had resulted in elevated prices. Even with the recent selloff, U.S. stocks generally remain expensive. While we still favor equities over fixed income, we believe it is increasingly important to diversify equity risks.

Asset classes which have historically been negatively or non-correlated with stocks provide important diversification benefits. In the BlackRock Global Allocation Fund, we hold exposure to cash, gold, U.S. Treasuries and the Japanese yen to help mitigate risk and further diversify the portfolio. In this environment, we believe it is prudent to remain vigilant for changes in the correlation characteristics between asset classes.

View fund commentary

Global Allocation tools

See how the Global Allocation Fund has outperformed global stocks with one-third less volatility.*
Build a portfolio and then add the BlackRock Global Allocation Fund - see if it improved your results.
Russ Koesterich, CFA, JD
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies Group. He ...
Global Allocation Monthly Insights

Subscribe to get timely market outlooks and portfolio positioning insights every month.