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Volatility Returns

Posted:March 7, 2020

Categories: Markets, Bear Markets, Bonds

Volatility has returned to global financial markets. As seen in figure 1 below, the Volatility Index (“VIX”) has spiked to the highest level since 2015. However, looking further back, the VIX is nowhere near the Great Recession of 2008-2009. History proves that volatility in financial markets is nothing new. However, since early 2009, the US markets have enjoyed a low period of volatility.

Coming into 2020, the US Stock market was naturally elevated after a decade long decline in the VIX (figure 2). Price to Earnings (P/E) ratios were also elevated (figure 3). As seen in this chart, in the past high levels of P/E ratios have correlated with weak future stock returns. Finally, heading into the new decade, the percentage change of a recession in the United States was as high (figure 4).

Market volatility is often triggered by a single event but is also multifaceted. The trigger is easy to spot by looking at the headlines: The Coronavirus. While no one knows or can predict the future of the Coronavirus, one thing is certain; markets hate uncertainty. The last two weeks of market action is largely explained by a volatility “trigger” coupled with uncertainty, fear, and elevated financial markets.

Portfolio Considerations

Having a properly diversified portfolio is important at all times, but especially so during market downturns. I’ve long been a proponent of creating portfolios with the goal of losing less when markets go down. Figure 5 below describes the idea of “downside protection”. The idea is a portfolio will perform well in the long run if it loses less (vs. the S&P; 500 index in this example) There is never any guarantee that any portfolio will perform well in down markets. However, below are a few strategies that may combat market volatility.

  • Allocating to bond and cash markets. Bonds tend to be much less volatile compared with stocks.
  • Allocating to gold. Gold can now be bought as a financial instrument through an Exchange-Traded fund as well as through mutual fund managers.
  • Using managers that have the freedom to invest in multi-asset portfolios (stocks, bonds, cash, commodities, currencies, etc.)
  • Invest with managers that have shown the ability to not be afraid to hold less risky investments during elevated markets.
  • Allocating to alternative strategies that may “lose less” or even perform opposite global stock markets.

The Volatility Playbook

So what’s the playbook when fear enters the markets? Remembering key messages about markets and portfolio construction can be helpful during these times:

  • Market volatility is normal.
  • History shows us that stock markets go up and down.
  • Do not panic.
  • Investing is a long-term venture.
  • Stocks are upward trending over time.
  • Bonds always play a role in portfolios.
  • Do not be quick to sell stocks during down markets.
  • Be patient with managers that are underperforming the market as long as the strategy has not changed.
  • Set and review “percentage bands” in terms of asset allocation and individual managers.
  • Take advantage of depressed stock markets and buy when stocks are cheap.
  • Trust in the portfolio as constructed and be patient.


Volatility is normal. As I stated before, the last two weeks of market action is largely explained by a volatility “trigger” coupled with uncertainty, fear, and elevated financial markets. It’s important now more than ever to be patient in managing portfolios in the wake of recent market events.

Figure 1: VIX (15-Years)

Figure 2: Bull Market in Equities

VIX 15 Year

Source: Kwanti

Figure 2: Bull Market in Equities

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Source: David Rosenberg

Figure 3: P/E Ratios & Stock Performance

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Source: Crestmont Research

Figure 4: Probability of a Recession 12 Months Ahead

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Source: David Rosenberg

Figure 5: Half & Half

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Source: Crestmont Research


Rosenberg Research - Economic Commentary “The Year Ahead 2020”
Crestmont Research - Quarterly Charts Q1 2020


For disclosures and index definitions please click here.