Viewing the overall market as we move forward in 2016, surrounding uncertainty could leave performance vulnerable to volatility. Unpredictable catalysts have left markets with a lack of stability.
Just recently, markets saw a drop in performance after comments were made by New York Federal Reserve President William Dudley and San Francisco Federal Reserve Bank President John Williams on the possibility of an interest rate hike this year. The comments preceded last week’s Federal Reserve Jackson Hole meeting where Chair Janet Yellen gave an update on the subject that was lacking in clarity. The will-they-won’t-they dynamic of the Fed’s decision to increase interest rates remains uncertain when realizing that as many as four interest rate hikes were predicted for 2016. Now heading into September, the odds are we will only see one – if any at all.
Exacerbating this ambiguous atmosphere, major market indexes have hit new highs and P/Es and earnings of the S&P 500 are sitting comfortably. This seemingly pattern of promise has left the VIX consistently measuring in at low figures. In fact, the volatility index has been hitting levels of historical calmness. This month the VIX fell to a two-year low and saw the least volatile 30-day period in more than two decades – that’s right, 20 years!
The uncertainty coming from the Fed and the complacency of the VIX leaves investors exposed to possible economic disappointments which would create an increase in volatility. While you’d think a low fear gauge and lack of interest rate hikes would seem promising for the future of the market, both are actually contributing to the underpricing of the risk that is ahead. With more influential factors set to impact the market as the year moves on – Congress, the election, etc. – it seems unlikely that market performance will continue on the path it’s been on.
Understanding that there could be volatility ahead, it’s important to evaluate how your portfolio will be protected during periods of market fluctuation. Investments that utilize a low volatility strategy will be the ones more likely to outperform as the full impact of the market uncertainty comes to fruition. These portfolios offer an effective means to manage risk and offer downside protection during any upcoming turbulent times. As one evaluates these strategies, simple, cheap index exposure may not be enough. Investors may want to consider capturing upside through valuation and additional factors.
To learn more about his low volatility investment strategy and market outlook listen here to David’s segment on Bloomberg Radio’s Taking Stock.
David Harden is President and Chief Investment Officer at Summit Global Investments, an SEC registered investment adviser specializing in low volatility investment strategies. Learn more at www.summitglobalinvestments.com.