Blackrock's Russ Koesterich believes low volatility in the markets is reflective of investor complacency. Year-to-date, market volatility is around 14, compared to historical average of around 19. More recently the VIX Index has dropped as low as 12, approaching the multi-year lows seen in March and August. Koesterich believes that to a certain extent these low levels are justified. Strong market momentum and easy credit conditions are two factors highly correlated with low volatility. The problem today is that even after accounting for strong momentum and benign credit conditions, volatility looks unjustifiably low. Koesterich warns that investors should be wary of looming political instability. Historically, when political and policy uncertainty is elevated, volatility has been higher. The current low levels of volatility indicate markets are overlooking a number of issues in Washington that may result in a spike in volatility. (VIEW LINK)
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