Practical analysis for investment professionals
24 October 2014

Weekend Reads for Investors: Volatility and the “Yellen Put”

Posted In: Weekend Reads

Up until last week’s wild ride for stocks, volatility had been largely absent from the market and far from the minds of investors. However, the cumulative effect of ongoing geopolitical chaos, spreading Ebola anxiety, and uninspiring economic data, combined with the rumored unwinding of some leveraged positions by hedge funds, served to at least temporarily jolt global equity markets. Complacency was quickly replaced with panic and we got a reminder of what happens when everyone heads for the exit at the same time.

In the United States, the Chicago Board Options Exchange’s SPX Volatility Index (VIX), which earlier this year had been trading at a seven-year low, spiked nearly 70% over the course of the week, and the S&P 500 Index (SPX) dropped over 9% from its high the previous month. BlackRock chief investment strategist Russ Koesterich, CFA, who recently predicted that volatility would rise and “the smooth ride for equities [come] to an end,” proved prescient.

During the tenure of former chairman Alan Greenspan, the US Federal Reserve Board’s monetary policy included the implicit understanding that the Fed would step in to provide liquidity in times of market crisis. This became known as the “Greenspan Put,” and it was put into practice at various moments of extreme market stress, beginning with the stock market crash of 1987, and more recently as the “Bernanke Put” in response to the global financial crisis.

Critics have long charged that such repeated central bank interventions have created a moral hazard for investors — a tendency to take undue risk due to a belief that any negative consequences will be borne by others. In case there were any doubts of the existence of a “Yellen Put” under current Fed leadership, James Bullard, head of the Federal Reserve Bank of St. Louis, put them to rest when he suggested, at the depths of the recent sell-off, that the Fed might reconsider ending its latest quantitative easing campaign. In response, the VIX, Wall Street’s so-called “fear gauge,” quickly retreated and US stocks rebounded sharply, as did their European counterparts upon similarly supportive statements out of the European Central Bank.

A well-worn stock market adage says, “Trees don’t grow to the sky.” This remains true despite the best efforts of central bankers.

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

Behavioral Matters

Emerging Markets

Shareholder Values

Big Business

High Profiles

Pork Barrel Politics

  • Taxpayer-funded rabbit massages and synchronized swimming for sea monkeys are among the highlights in Senator Tom Coburn’s 2014 Wastebook (PDF).

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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