We all knew volatility couldn’t stay low forever, even with solid global growth and low inflation. Rising volatility is common in the late stage of the economic cycle, and negative headlines have been dominating market sentiment. Given recent concerns about higher-than-expected inflation, more aggressive central bank action, rising US deficits and a “tariff tantrum,” the case for market uncertainty continues. I wouldn’t be surprised if volatility remained elevated for the rest of this year.
Moving on up
It’s not just the headlines. Data also supports the case for higher volatility. I analyzed the standard deviation of major asset class returns during economic expansions within the last 15 years. Compared to this historical average, current volatility is actually very low, particularly in the high yield, emerging market debt, and equity markets. While volatility in US equities has risen in the last year, it’s still more than 15% below the average volatility in expansionary periods. Central bank policy, inflation expectations, potential trade wars and historical data support volatility remaining elevated and likely moving higher.
During periods of higher volatility, it’s important to be prepared. Here are a few strategies to help investors navigate a higher-volatility environment:
- Understand correlations before you allocate
True diversification requires more than allocating broadly across asset classes. I believe understanding the relationships, or correlations, between asset classes over time is critical for protecting capital. When do correlations change? When do they remain stable? Identifying the patterns and when they happen can help investors maintain a truly diversified portfolio that can withstand higher volatility.
- Seek quality, sustainable income