Capital Ideas

With the CBOE Volatility Index (VIX) reaching all-time lows last year, it was easy for investors to get complacent. But volatility has moved in multi-year cycles throughout the history of the VIX, so the relative tranquility of 2017 was not likely to persist forever. Volatility has picked up in recent weeks as markets have focused on the uncertainty surrounding monetary policy, inflation, and the trajectory of interest rates. While some pickup in volatility from last year’s extremely low levels is to be expected, it is too early to say if we are in a new volatility regime. Investors should be aware that periods of high volatility have historically been accompanied by below-average returns in the S&P 500 Index. However, these cycles can also create new opportunities. Fundamental research can help identify value in mispriced stocks and potentially achieve greater-than-index returns.