Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 191

‘Episodic’ market volatility ahead for 2017

Episodic bouts of equity market volatility in 2017 could presage a market crisis in 2018, and much hinges on the macro response of global economies in what will be a very interesting year.

The US is the wildcard in the global market outlook for the year, but market volatility in 2017 will likely be irregular rather than prolonged. However, the levels of asset price distortion in the market are expected to rectify during the year and this could be the forerunner of a sharp downturn and increased average volatility in 2018.

Recent volatility levels

Despite market commentators talking about high levels of volatility in the past year, it actually was not a very volatile year when the movements in the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) are considered.

The VIX Index, also called the Fear Index, measures expected volatility on the S&P500 Index over the next 30 days. If investors expect that the market will move sharply (either up or down), the VIX will give a high reading.

The 20-year average of the VIX registers at just shy of 20, although it has moved as low as 10 and as high as 85. Although the VIX had the occasional rally in the past year it started from a very low base. There were a few volatility spikes during the year but no ongoing activity.

With 20 considered to be the baseline for volatility, the VIX was actually below this baseline 83% of the time in 2016, as shown below. In fact, the past three years have been incredibly non-volatile from an historical point of view.

Volatility Index (VIX) in last 12 months

Source: Yahoo! Finance

This may surprise investors who read headlines on market gyrations and assume markets have been volatile. But many of those movements are just little blips on the chart. When you are living it, those blips feel large, but historically they’re not.

In fact, the years since the Greek crisis, from 2012 onwards, occupy some of the calmest periods in the VIX’s history since 1990.

Drivers in 2017 and the overvaluation of assets

We expect this trend will continue into 2017, but there will be some key drivers of episodic market volatility to watch out for.

Policy uncertainty is a big driver of volatility, and with the election of President Trump, world markets have plenty of that. The second driver, closely related, will be the movement in the US dollar. The third will be oil and commodity prices, which are intermittently linked to the movement in the dollar. The fourth will be interest rates and the speed in which the US Federal Reserve (the Fed) undertakes interest rate hikes.

Economic growth is starting to happen in countries where it hasn’t occurred in recent times. We are already seeing green shoots of inflation - even in Europe - in the most recent data. We are certainly expecting inflation in the US, and President Trump pump-priming the economy will also impact inflation.

The Fed is considered by many to be behind the curve in this regard, and its reaction may be to raise rates higher and faster than the market anticipates. This will have a negative flow on effect because of the overvaluation of many assets globally. Many housing markets around the world are overvalued, along with equity markets, as well as the asset classes that have been pumped up for the past five years.

If rates surprise on the upside – and President Trump’s policies feed into that – a market downturn is inevitable for 2018.

A depressed US market is bad news for global economies. Stocks globally are priced at fairly high levels, and a rapid rise in rates could see a lot of that come undone. If the $US continues to rally, that is also not good for emerging markets, because their debt is denominated in dollars and so in local currency terms their obligations increase.

Opportunities for investors

This expected volatility, whether episodic or prolonged, creates opportunities for investors.

Investors should consider using options over the VIX to prepare for these bouts of volatility ahead of a potential market downturn in 2018.

Although most investors see volatility as simply a measure of risk, it is also an asset class in and of itself. An investment in volatility can be accessed through VIX options, which have been one of the fastest growing option markets in recent years. Volatility is usually negatively correlated to equity markets, so that when equity markets fall, volatility tends to rise, and vice versa. Investing in options on the VIX Index allows investors to access this negative correlation to the S&P500 which cannot be as reliably harnessed in other asset classes.

Although the VIX is a measure of the US, and not the Australian, equity market it is still a useful diversification tool for domestic holdings. Australian and US markets are highly correlated, and particularly so in periods where markets are falling. VIX options now rank up with the world’s most liquid, and have been known to trade over 1 million option contracts per day.

Generally speaking, people want to own equities because over the long run they do well. Allocating a portion of the portfolio to a volatility strategy can help to mitigate or circumvent the losses that come when the markets go down.


Simon Ho is Chief Investment Officer of Triple3 Partners. This article is general information and does not consider the circumstances of any investor.


Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Latest Updates


Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.


How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.


Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.