Volatility declines, but past recessions say more may be ahead
Ready for a bumpy ride? See why investors would be wise to prepare for more volatility in the coming months.
April 10, 2020 | 1 minute read
The recent downturn and presumed recession have been characterized by extreme volatility across credit, equity and commodity markets. In March, much of the volatility was to the downside, while activity thus far in April has seen a partial recovery along with a notable decline in the CBOE Volatility Index (VIX) from its historic high on March 16.
Recent market momentum has led some investors to ask whether the S&P reached a bottom in late March. While it is not possible to call a market bottom, or top, until months after the fact, it is instructive to look at how markets have behaved through the past several recessions.
From this perspective, it seems likely that no matter the market’s direction in the next 1, 6 or 12 months, volatility is likely to remain with us for some time. The chart shows the VIX during the current bear market and each of the past three recessions.1
While the volatility of the current bear market is unprecedented compared to past recessions, it also shows that further bouts of volatility reemerged, often several times over the course of months, after the VIX initially peaked in each of the previous three recessions.1
Against this backdrop, investors would be wise to prepare for additional periods of volatility, particularly given that markets have digested only a small fraction of the difficult economic news that likely lies ahead.