The volatility experienced in the U.S. equity markets in August 2011 attracted widespread media and investor attention. Much of the media commentary focused on perceived causes for the volatility—such as the growth of hedge funds, high-frequency trading, and inverse exchange-traded funds. Little focus, meanwhile, was placed on the global macro environment, which faced a resurgence of the Eurozone debt crisis, the prospect of a slowing global economy, and political brinksmanship in Washington, D.C. And on August 5, Standard & Poor’s announced a formal downgrade of U.S. Treasury bonds from their AAA status, arguably creating even more uncertainty in a market already struggling.
Although the stock market volatility appears extraordinary relative to the calm of the last year, the levels of market variations today are, in fact, “ordinary” relative to the volatility of other recent periods characterized by major global macro events.
August’s volatility in equities, although high and painful to many investors, was not unexpected, given the market environment.
Going forward, it’s unknown whether the volatility will stay the same, increase, or decrease. What we do know is that previous periods of excess volatility have clustered around global macro events, and that, during those periods, portfolios that included allocations to less risky assets such as bonds and/or cash tended to ride out the storm much more smoothly.
Source: Extracted from Vanguard Research Commentary, September 2011; Authored by Francis M. Kinniry Jr., CFA; Todd Schlanger; and Christopher B. Philips, CFA
No comments:
Post a Comment