One of the more seductive pseudo-science arguments making the rounds in the market today is that the current period of low market volatility is a warning sign to be fearful of. In this video and edited transcript below, Emma Davidson asks Miles Staude if investors should be worried by low financial market volatility.
Markets are just as likely to rally as fall after a period of low volatility.
Firstly, yes volatility in financial markets has been much lower than usual for some time. The conclusion however that this means investors are being too complacent, part of some argument that we are witnessing excessive optimism, is not at all clear or reasonable. There are plenty of potentially good reasons as to why volatility has been low recently, you could easily argue that it is a by-product of the broad synchronised upswing we are currently in. Away from what might be driving low volatility however, much more importantly, there is no reason to think low volatility on its own is a reason to be nervous. We’ve had periods of low volatility in the past, extended periods of low volatility like now, and it has never historically been a useful predictor as to what markets will do next. Markets are just as likely to rally as fall after a period of low volatility.