Displaying items by tag: volatility

Seems volatility hunkered down with a good book in front of a roaring fireplace and felt well at home this month.

During October, implied volatility was unfailingly hovered well above average. In fact, it hit its highest monthly average since June 2020, according to gia.com. Down to the nitty gritty: half of the days parked beyond the first two weeks of the months experienced swings in the equity market of at least +/- 2%. Joining the party was an Oct. 13 intra-day move exceeding 5%. That unfolded before the gales of an advance in the midst of the months’ second half.

As for next year? Um, don’t ask. According to msn.com, with investors updating their economic outcome probabilities, UBS Global Wealth Management recently said investors should figure on even more volatility in the 2023 S&P.

"Large month-to-month swings could continue well into next year," said UBS.

In all probability, wide monthly S&P 500 swings will stretch in 2023. Why? Investors will watch moves by the Fed and economic data to ascertain the chances of a soft landing or recession in the U.S.

"[Expect] more volatility and large market swings exacerbated by positioning as investors update their economic outcome probabilities in reaction to each new data point and Fed utterance," Jason Draho, head of Asset Allocation Americas at UBS Global Wealth Management, in a note.

Try active fixed management, which has an eye on managing the different risk characteristics of the fixed income market, according to madisoninvestments.com.

When these risks bubble to the top, the price tag on a bond might go kerplunk, potentially jeopardizing  interest payments down the line. The upshot: your portfolio could take a hit. Yeah; ouch. Meantime, common as they are, passive buy and hold strategies – or ETFs – have a history of missing the mark on addressing risks linked with fixed income.

On the radar of active fixed management is managing the various risk characteristics of the fixed income market. A portfolio can act in light of market conditions with active decision making within a portfolio.

Okay, so if you’re searching high and low for white knuckle thrills, fixed income investing might not be the Uber pickup you’re looking for. 

But…Isn’t there always one? The market volatility sparked by the aftermath of the COVID pandemic, bond specialists might want to hold on tight, according to benefitscanada.com.

“There’s more yield in the marketplace, so bonds are becoming a better competitor to stocks. . . . You should be asking yourself, how do I get more to my portfolio’s core allocation?” said Jeffrey Moore, portfolio manager in the fixed income division at Fidelity Investments, during the Canadian Investment Review‘s 2022 Risk Management Conference, the site continued. “I think there’s a whole bunch of ways.”

While income investors are certainly enjoying higher yields this year, the past decade had not been as kind. The low to flat interest rates over the past ten years may have helped propel the economy and markets since the financial crisis, but they also made it quite difficult for investors to find income. So, Wall Street firms got creative and created complex investment products that offered higher yields. But with rates rising this year, those same products are putting firms at risk, which is why they're jostling to hedge those positions by investing in derivatives that benefit from higher volatility in the market. However, those derivatives are making volatility in the US government bond market even worse. Treasuries were already experiencing massive swings as investors bought derivatives to lessen their bond risk, while dealers made long-volatility bets to hedge their own exposure. This combination led to a huge jump in the MOVE Index, which measures the implied volatility of Treasuries via options pricing. In October, the index breached 160, which is near the highest level since the financial crisis. With additional money betting on the ups and downs of bond yields, this is only going to add more fuel to the fire.

Finsum:As firms increase in their purchases of volatility-linked derivatives to hedge risk, the treasury market is expected to become even more volatile.

According to research reported in the latest edition of Cerulli Edge, the demand for financial planning increases with market volatility. Cerulli said that investors experiencing market volatility for the first time are more open to receiving advisor guidance. The report noted that eighteen percent of investors working with an advisor do not have a financial plan in place, but they do consider one important. In light of that figure, Cerulli recommends that advisors consider re-introducing their financial planning services, especially during periods of high market volatility, since some clients may not be aware of their planning offerings. The research noted that advisors who offer financial planning find that their clients are better positioned to stay the course and remain calm when market performance declines, which enables advisors to develop stronger client relationships. Scott Smith, Director of Advice Relationships at Cerulli Associates, said the following, “Financial planning shifts the focus to progress made toward achieving goals rather than investment performance. This frames volatility in the context of a bigger picture, which helps clients feel prepared when market shocks arise.”

Finsum:Based on a new Cerulli research report, clients are better positioned to stay the course during market volatility if their advisors offer financial planning.

Yields on developed market government bonds have been soaring this year, as a result of higher inflation, sharp rate hikes, and quantitative tightening. The latter of which is what has traders nervous right now. The Federal Reserve is looking to increase the pace of winding down its nearly $9 trillion balance sheet, while the European Central Bank has also been looking to shrink its €5 trillion bond portfolio. Central banks built up their balance sheets with bond purchases to help provide a stimulus for the economy, but with the current high inflation, banks are now looking to sell those bonds. With the bond market already facing pressure due to the rate hikes, further quantitative tightening could make trading even more difficult by worsening liquidity and increasing volatility. The Bank of England has already been forced to delay its quantitative tightening due to turmoil in the UK bond market. That turmoil, which also spread to the U.S. and European bond markets, has only added to the liquidity and volatility concerns.

Finsum:An increase in Quantitative Tightening by central banks could lead to more volatility in the bond markets.