Checking in on Volatility

The VIX hit a new low for the year on Friday at a little above 12.5, before closing near 13. 

For perspective: the high this year was 23.43 in mid January. The high last October when the S&P 500 was correcting was near 31.

• One of my key themes since I started actively writing this blog to help investors make some sense of all things impacting the management of their wealth, has been that central banks do not like volatility because it erodes confidence in financial markets.
• Investor confidence is directly related to economic confidence and plays a major role in the decision making of households and businesses as they determine their desire for future spending.
• If households are confident about the future of their net worth (asset growth and income growth), they will be more inclined to spend.
• If businesses are confident about future prospects for growth, they will invest in growing their respective companies.
• Future economic growth is contingent on "upbeat" consumer and business spending.

There is a lot riding on this confidence thing:

• At the moment, businesses are still sitting on very large amounts of cash.
• A recent survey of global investors by Barclays suggests some of the key concerns that investors have:
• more at : http://www.bloomberg.com/news/articles/2015-03-23/five-charts-that-show-what-investors-are-thinking-now

(click on the chart to enlarge)

Are the central banks just buying time?

or

Do they actually have control?

• This is an important consideration.
• There are still many uncertainties hovering over financial markets and the global economic condition.

In addition to the concerns in the chart above:

• Are current asset prices inflated by so much global monetary stimulus? 

• As we end Q1 2015, what impact will the strong $US have on S&P 500 earnings? Earnings and future earnings are the key fundamentals for equity valuation. At this point earnings (for Q1) expectations have declined by an approx. 8% since Dec. 31.  more here:(file:///C:/Users/JScott/Downloads/EarningsInsight_032015.pdf

• If volatility should return, do central banks have enough "arrows in their quiver" to answer it?
• 
  

From 2004 until 2006 volatility was subdued and began picking up in 2007 and spiked in 2008.

From 2012 until 2014 volatility was subdued and has picked up in 2015, will history repeat?

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.