All has been relatively quiet across global markets for some time now. Except for a few short-lived volatility flare-ups, stocks have been climbing higher in many markets. In fact, the U.S. stock market, as measured by the S&P 500®,1 was up more than 15%* for the one-year period ending June 1, 2017, while the STOXX Europe 600 Index2 is on track to advance for the fourth quarter in a row at the end of June. The most popular barometer of stock market volatility, the VIX (the Chicago Board Options Exchange Volatility Index®),3 has been hovering in the historically low 10 range since July 2016. In comparison, its historic average is around 20.
Also interesting is that the Bank of America Merrill Lynch’s MOVE index4 – a measure of expected volatility in the $14 trillion U.S. Treasury market – has been waning through early 2017. While the MOVE did record an uptick in April following the results of the first round of the French presidential election, it quickly settled back down. This relative calm in the markets has been happening while geopolitical tensions seem to be escalating every day. In fact, many investors may be scratching their heads and wondering why volatility is so low, and how long can it last?
Stock and bond volatility near historic lows
Source: Bloomberg, Natixis Investment Strategies Group.
Interest in low volatility strategies growing?
While volatility measures have remained low, U.S. stock valuations remained above historical averages as of June 1. Although we don’t know when volatility will rise, we do know that it has the potential to reappear at any time. This may foster an increased interest in some low volatility equity strategies5 that may benefit from, or help protect against, potential future declines in the stock market.
In fact, half of the respondents to our 2016 Global Survey of Institutional Investors cite volatility as the biggest threat to investment performance in 2017. As a result, many seem to be resetting expectations and strategies. But their anticipation may not be filled with anxiety. Instead, institutional investors seem to have embraced the uncertainty and come to terms with the risks. Their response is likely to be measured and focused on risk-managed solutions for generating long-term growth.
Make risk work for you
Traditionally, portfolios have been built around the return expectations needed to achieve long-term goals. However, putting risk first in the investment process may help to build smarter portfolios. That is why we have made it the first principle of our Durable Portfolio Construction® philosophy. Talk to your financial advisor about ways to manage risk in the pursuit of your financial goals.
STRATEGIES TO CONSIDER
Funds that look to navigate market volatility in search of opportunity
Some value-oriented equity managers look at market sell-offs as an opportune time to find stocks of quality companies at discount prices. While bond managers with flexible mandates can maneuver to areas they believe offer value and away from riskier sectors.
Funds that look to provide stabilization in the event of market downturns
There are strategies available across equities, fixed income, multiple asset classes, and alternatives, that utilize different techniques in an attempt to help stabilize the portfolio during volatile times. Low volatility equity, hedged-equity, and multi-sector fixed income are a few types.
Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Volatility management techniques may result in periods of loss and underperformance, may limit the Fund’s ability to participate in rising markets and may increase transaction costs. Equity securities/stocks are volatile and can decline significantly in response to broad market and economic conditions. Fixed-income securities/Bonds may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
1 S&P 500® Index is a widely recognized measure of U.S. stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large cap segment of the US equities market.
2 The STOXX® Europe 600 Index is derived from the STOXX® Europe Total Market Index (TMI) and is a subset of the STOXX® Global 1800 Index. With a fixed number of 600 components, the STOXX® Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
3 The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500® stock index option prices. The CBOE Volatility Index® (VIX®) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes, first and second month expirations are used until eight days from expiration, then the second and third are used.
4 The Bank of America Merrill Lynch MOVE index, or Merrill Lynch Option Volatility Estimate, is a weighted measure of implied volatility for one-month U.S. dollar interest rate options across the yield curve or the yield of fixed-interest securities over the length of time they have to maturity.
5 The term low volatility equity strategies refers to investments into securities that are thought to have less dramatic value fluctuation in the near-term and instead change value at a steady pace over time although no security’s value fluctuation can be guaranteed or known in advance.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Natixis Global Asset Management does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.