What’s Up With Volatility?
With just a couple weeks to go before the end of 2014, volatility has returned to the financial markets. We couldn’t quite make it through the rest of the year without one more bout of investor fear.
The VIX has climbed above 20 for only the third time this year. And while that’s not a big number compared to past volatile periods, it still tends to mark the cutoff between volatile and tame markets.
Both other periods of 20+ VIX readings this year ended quickly. So should we expect more of the same, or have we finally entered a period of sustained volatility?
Most likely, the VIX is going to be back under 15 before you know it.
Here’s the thing…
The reasons behind the recent surge in volatility aren’t particularly unnerving.
First off, the markets have been dropping along with the price of crude oil. Yes, the plunge is crude is somewhat disconcerting (at just $57 a barrel as of this writing), but it’s probably more good news than bad.
Cheap crude oil means cheaper gasoline. Cheaper gasoline means more money for consumers to spend in other areas of the economy. That’s a good thing, right?
I suppose you could argue that oil this cheap implies a global economic slowdown. But, isn’t that something we already knew was happening? Plus, it’s not as much of a factor in the US, where the economy is still in pretty good shape.
Speaking of the economy, perhaps all the good economic news lately has investors worried about interest rates going up? While it’s more likely than before that rates will rise in 2015, it’s certainly not a sure thing. The Fed is going to be reluctant to kill the momentum we’re seeing. Plus, any raise we may see is likely to be small.
Finally, there seems to be some fear about another government shutdown after the House passed a somewhat controversial $1.1 trillion spending bill. I find the possibility highly unlikely. Congress was widely and heavily criticized the last time it forced a shutdown. I don’t see the same mistake occurring again.
So, let’s summarize the reasons for the likely spike in the VIX. The price of oil is plunging. The US economy is improving. And, Congress may not agree on a spending bill.
If you think about it, the first two are actually positive, while the third is not at all likely to occur. As such, it’s safe to say this volatility spike will be short-lived. Feel free to go about your normal investing business.
Yours in Profit,
Gordon Lewis
Category: Stocks
