What’s artificially driving volatility down?
Brian Singer, head of William Blair’s dynamic allocation strategies team and portfolio manager of the William Blair Macro Allocation Fund, posted a new commentary that looks at today’s low market volatility.
“Today’s market volatility is extremely low,” he writes. “In fact, over the past 50 years, there have been only two other periods — the mid ’60s and 1994 — where realized volatility for the S&P 500 was at or below current levels.”
The CBOE Volatility Index (VIX) has been below 10% for only 11 total days in the past 20 years — interestingly, seven of those days have occurred since mid-May 2017.
On Monday, the VIX fell below 11.
During sustained low periods of volatility in the past, Singer has repeatedly observed bad behavior by investors, such as increasing leverage and systematic market exposures.
“We certainly are seeing some indication of bad behavior by market participants, and we don’t want to be players in that same bad behavior,” he writes.
Singer believes there are several conditions that have driven volatility to artificially low levels.
A Changing Market Structure
The market structure has changed significantly, according to Singer.
Singer points to recent JPMorgan research that shows passive and quantitative investing accounts for about 60% of trading volume, which has more than doubled in the past 10 years.