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Does Volatility Equal Risk?

Does Volatility Equal Risk?

If you were sitting at an advisory firm as I was in 1994, or if you were an investor, you will recall a few things about 1994 vividly:

  1. The Fed rate hike cycle sending bond prices plummeting–dubbed by Fortune Magazine as the “Bond Market Massacre”
  2. Orange County having the then-largest municipal bankruptcy in U.S. history
  3. Stocks being incredibly volatile.

Dictionary definition of Volatility = liability to change rapidly and unpredictably, especially for the worse

If you owned the S&P 500 Index in 1994 and held on, you gained just 1.32% after all the ups and downs of the year. Know what happened after 1994? Yep–5 years in a row, back to back returns of more than 20% annually in the S&P 500 Index–the likes of which history had never before seen.

Recently, the Vix has been low and seemingly trending lower. (VIX is the ticker symbol for the Volatility Index at the Chicago Board Options Exchange (CBOE) which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.) So, what’s the point of looking back to 1994 and Stock Market Volatility when there just doesn’t seem to be any in the market today?

The Federal Reserve raised the Fed Funds rate in December of 2016 a quarter of a point–only the 2nd rate increase in a decade. Some in the investment community expect the Federal Reserve to raise the Fed Funds rate as much as 3 times in 2017.

With a Fed bias toward rate hikes, one might imagine that there may be inflationary pressures mounting. With the Trump Agenda and the consistency of an anticipatory market (straight up since Trump took office), our view is that the risk of volatility in both stocks and bonds is growing greater and that investors should pay attention and not be lulled to complacency.

Special attention should be given to a bond portfolio, looking at duration and credit quality, and consider tolerance for the volatility that rate increases can sometimes bring to the stock market.

Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.

Source: Bloomberg, Business Insider, Forbes Magazine