Viewpoints

Quick Takes: Is Volatility Here to Stay?

Marc Seidner, CIO non-traditional strategies, explains why structural trends in the U.S. – unwinding unconventional monetary policy coupled with fiscal expansion – will likely lead to sustained market volatility and what investors can do to manage the risks.

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Marc Seidner: Investors are keenly aware of the recent uptake in financial market volatility. There are certain structural trends that may lead to this recent increase in volatility to be sustained for a period to come.

One of the structural trends is the ongoing unwind of extraordinary amounts of unconventional monetary policy, but perhaps more importantly the recent shift in the United States towards fiscal expansion.  It is extraordinarily unusual to have this amount of fiscal stimulus this late in an economic expansion with an unemployment rate already near 4%. 

The chart shows this quite clearly, it shows the unemployment rate plotted against the US federal budget balance.  As you can see for much of the past 70 years, fiscal policy has acted counter cyclically to offset economic declines and recessions, with stimulus that leads to increased hiring and declining unemployment. 

In the recent period, and in the period to come, these trends will diverge quite substantially. What it probably means is that on both ends of the distribution the tails are fatter, which could justify and likely will justify a much higher financial market volatility. 

What are the key risks? Well on the one hand, this amount of fiscal stimulus with limited excess slack and capacity in labour markets, may very well lead to rising inflation. On the other hand, it is becoming starkly apparent, that the fire power left for policy makers in the next cyclically economic down turn is much lower than it has been in the past. 

What should investors do?

Strategies favouring the diversification, and greater flexibility will likely be key to investors success, and moving away from traditional bench mark orientated strategies to more flexible bench mark agonist strategies. Those types of strategies will likely allow investors to navigate this coming period of market volatility and uncertainty much better than other alternatives. 

Disclosure


All investments contain risk and may lose value. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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