The Market Wrap 30-5-14

By Jason Fittler

Volatility is at an all time low in western markets.

That’s a good thing. Right?

Wrong.

Low volatility can be the start of a major fall at some point.

It was back in 2007 when volatility was this low. In the US volatility levels are at 11 and here in Australia at 12. By comparison back in 2009 at the height of the GFC the volatility levels were as high as 63.

What is the downside of low volatility?

People start to take on more and more leverage as they expect the markets to steadily rise. The reasoning is, if everyone else is doing it, I should too. This can create an asset-price bubble that eventually will burst.

We are not there yet, but it is something to keep and eye on. Especially, with the confirmation that borrowing to invest is back in favor.

What is causing this low volatility?

No one can say for sure, but I would think it is a combination of low interest rates and government meddling, which has provided the bases of the current low level of volatility.

Medium-term you can expect that the markets will continue to rise, but keep and eye on the horizon as long-term (10 years) you could see another sharp fall if gearing levels get out of hand.