Earnings season is now off to a very solid start following very strong gains in the equity sectors since the start of 2018. While US Federal Reserve interest rate hikes have been a tremendous benefit to the financial sector following years of quantitative easing, the continued and unabated advance of the equity bull market has also continued to cut into fixed-income and bond trading revenue.
One byproduct of volatility remaining near historic lows has been a steady decline in active trading as funds have flowed into ETFs and other passive investment vehicles. In other words, a cycle may have developed. As the perception of risk has decreased, use of passive investment vehicles has increased. This in turn reduces active investment, then contributing to a reduction in volatility.
Of course, the actual cause for the complacency in the markets could also be caused by the recent switch to algorithmic trading strategies, which can remove the human “emotion” element that may have contributed to volatility in the past. However, most agree that the current environment has been dramatically affected by years of easy money with investors moving further out on the risk curve in search of yield. Should corporate earnings or the policy of easy money be reversed (as has begun by the Fed raising interest rates), investors may soon find that this 9-year bull run is nearly over.
A very pertinent article on this topic, accompanied by commentary from various analysts and other experts, can be found on Bloomberg: https://www.bloomberg.com/news/articles/2018-01-19/why-is-volatility-so-low-some-see-crowded-trades-minsky-moment
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The Ignorant Investor really struggled at finding just ONE topic to comment on at this time, with potential subjects across equity markets, commodities, and currencies. Exciting times!
One byproduct of volatility remaining near historic lows has been a steady decline in active trading as funds have flowed into ETFs and other passive investment vehicles. In other words, a cycle may have developed. As the perception of risk has decreased, use of passive investment vehicles has increased. This in turn reduces active investment, then contributing to a reduction in volatility.
Of course, the actual cause for the complacency in the markets could also be caused by the recent switch to algorithmic trading strategies, which can remove the human “emotion” element that may have contributed to volatility in the past. However, most agree that the current environment has been dramatically affected by years of easy money with investors moving further out on the risk curve in search of yield. Should corporate earnings or the policy of easy money be reversed (as has begun by the Fed raising interest rates), investors may soon find that this 9-year bull run is nearly over.
A very pertinent article on this topic, accompanied by commentary from various analysts and other experts, can be found on Bloomberg: https://www.bloomberg.com/news/articles/2018-01-19/why-is-volatility-so-low-some-see-crowded-trades-minsky-moment
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The Ignorant Investor really struggled at finding just ONE topic to comment on at this time, with potential subjects across equity markets, commodities, and currencies. Exciting times!
