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magazineCould volatility return before the summer is out?
It is always tricky for investors to work out what’s coming next in the markets but it feels unusually difficult at the moment.
Several intertwined and competing factors are in play, including the coronavirus pandemic and its economic impact, tensions between China and the developed world and the support being offered by central banks and governments to prop up their economies and the markets.
Despite the unprecedented nature of the events of the last six months the MSCI World index, encompassing global developed markets, trades higher than it did at the beginning of the year.
However, the summer lull can often exacerbate volatility, with the thinner trading volumes seen when many traders are taking a break often leading to out-sized movements in stocks.
That was the case in August 2015 when another crisis which had effectively been ‘Made in China’, caused equities to wobble. Though on that occasion it was a debt bubble as opposed to a trade war and a pandemic that was behind the sell-off.
Those heady days five years ago saw the VIX ‘fear index’ hit its most recent high before the record levels seen during the height of the current crisis in March 2020.
This shorthand gauge of investor nervousness measures the market’s expectation of 30-day volatility on the S&P 500, as implied by the prices of near-term options.
NO PLACE FOR COMPLACENCY
It remains relatively subdued for now but investors shouldn’t be complacent about the risk of that changing given the factors discussed above.
If and when there is a correction in the markets, investors should retain a long-term perspective. We have covered some of things you can do to prepare for a downturn in recent issues and we will cover any developments as and when they happen. Market weakness also creates opportunities and we will be alive to these too.
Today the old adage, when the US sneezes the world gets a cold may equally be said to apply to China (and feels particularly apt in the current circumstances).
Everyone should have a handle on what is going on with the world’s second largest economy and in this week’s issue we go into depth on China’s continuing rise and the threat posed to it by confrontations with the West.
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Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
