Investing amid Volatility: A Resource Guide
The first few weeks of 2016 have produced the worst start to a year for US equity markets ever recorded.
The US Federal Reserve recently began the process of unwinding its extraordinary support measures for the markets, which had been in place since the financial crisis in 2008. The Fed raised the target federal funds rate by 25 basis points (bps) and now world markets are in a tizzy. Japan, China, and Europe are struggling and it’s not clear that the United States has the economic strength to emerge unscathed.
It’s only natural to be worried. But what’s an investor to do? Has the game changed? Will my portfolio get crushed? Am I doing right by my clients? So many questions.
In response, we have assembled a list of articles, presentations. and observations that we hope are timely and helpful in light of the present market turmoil.
- “Tips on How to Manage Money in a Bear Market“: Jason Voss, CFA, gives seasoned advice on what to look for and what to do in a falling market.
- “Historical Perspective: How Today’s US Stock Market Stacks Up against Past Bull Markets“: David Larrabee, CFA, reviews the length and magnitude of past bull markets and compares then to the post-2008 bull market.
- “The Ruble Crisis: Where Oil Goes, the Ruble Follows“: In this piece, I demonstrate the similarities and differences between the Russia of 1998 and the Russia of today.
- “Diverging Markets and Shades of 2007“: James A. Bianco makes the case that the economy is not ready for a rate hike. (CFA Institute Conference Proceedings Quarterly)
- “Global Economic Outlook: Opportunities and Challenges for MENA Investors“: Nouriel Roubini shares his perspective on the global economy. (CFA Institute Conference Proceedings Quarterly)
- “Financial Market History Roundtable, Boston“: CFA Institute convened a blue-ribbon panel to examine the lessons of financial history and how investors might make money from those lessons. Here is a synopsis of the various insights. (CFA Institute Conference Proceedings Quarterly)
- “House of Debt“: The venerable Amir Sufi explains the underlying structural problems in the US economy. (CFA Institute Conference Proceedings Quarterly)
- “Enduring Principles of Value Investing“: Legendary value investor Charles Brandes, CFA, describes his chance encounter with Ben Graham and the lessons he accrued over a lifetime of investing. (CFA Institute Conference Proceedings Quarterly)
- “Asset Allocation Implications of the Global Volatility Premium“: Authors William Fallon, James Park, and Danny Yu demonstrate that shorting volatility can be a lucrative enterprise. (Financial Analysts Journal)
- “The Crash Risks of Style Investing: Can They Be Internationally Diversified“: The authors demonstrate that international diversification can reduce the crash risks of size and value, but not momentum. (Financial Analysts Journal)
- “The G-Zero World“: Ian Bremmer says that investors must brace for dramatic geopolitical disorder. (CFA Institute Magazine)
- “The Effects of FX!“: Ronald G. Layard-Liesching spells out his thesis that quantitative easing (QE) has distorted the risk premia for risk assets globally and that foreign exchange (FX) markets have become the world’s most important market.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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This is excellent, Ron–thanks for assembling these resources.
The start to this year has certainly been bearish, but I think financial writers have been a little too quick in labeling this a “high-volatility” market. I just published a short commentary (https://www.reit.com/data-research/research/market-commentary/has-volatility-reared-its-ugly-head-again-no-not-really) saying that only after January 13 did stock market volatility move out of its “normal” range (which I define as the interquartile range of daily volatilities over the 16-year period since the beginning of 1999 for which I have daily data). Put another way, on one-fifth of trading days since the beginning of 1999 stock market volatility has been higher than its current value.
That’s not to say the market can’t become much more volatile going forward–I can’t predict that with any confidence. But we’re not there yet, and bearish is not always the same as volatile.
Much obliged, Brad! Point noted on volatility – I chose that word rather than take a bearish or bullish position on the markets. But you are right… volatility hasn’t been abnormal so much as the direction has been “trending in a downward direction.” 😉 Thanks for the catch.
Great links and I really appreciated your smart note, Brad Case, on volatility. I was going to ask how you defined volatility (because so much of the press just throws the term around, as you well know). Sure enough, you share at the end: “volatilities are computed using a dynamic conditional correlation model with generalized autoregressive conditional heteroscedasticity (DCC-GARCH, developed by Nobel prize-winning economist Robert Engle). DCC-GARCH is pretty much the state of the art for this sort of analysis because it’s both accurate and sensitive to the most recent market conditions. The model is estimated using daily data, but weekly data show a very similar pattern.”
Thanks for your comment, David. I should point out–though you probably already know it–that an actual volatility number (say, 12.3%) doesn’t mean a whole lot unless you know the frequency of the data that was used to compute it, and also whether it has been or needs to be corrected for autocorrelation. Extraordinarily low volatilities are often quoted for illiquid assets, such as non-traded real estate, but those are meaningless because they aren’t corrected for measurement problems. But if you’re comparing volatility over time for the same type of asset with the same methods for measuring it, then you can certainly say something worthwhile about how volatility has changed.
Ron,
Great article and resources provided here. I have been playing volatility ETF’s for about a year and half and must admit that things are starting off pretty shaky for markets here in 2016. Last year around August 2015 XIV – ETF which mirrors the S & P 500 Index was at almost 50.00 as of today it is down around 16.00. It hasn’t been that low for at least 3 to 4 years from charts I have looked at.
25 basis points isn’t even a 1% hike on the interest rate which has been at zero for almost 8 years or so… I don’t think the Fed can afford to raise the interest rates much higher. This was a concern from the IMF dating back the last 6 months of 2015.
It will be interesting to see how much lower oil goes with the over supply going into the markets. Any thoughts on what you think the price of oil per barrel will go once Iran dumps their supply onto the markets?