The Market Chart You Need to See This Week

In his first chart of the week post, BlackRock Global Chief Investment Strategist Richard Turnill shares a chart showing a theme he thinks will shape markets in the weeks ahead.

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There’s the old adage that a picture is worth a 1,000 words. I couldn’t agree more. That’s why in my role as BlackRock Global Chief Investment Strategist, I’ll be sharing a chart each week, here on the BlackRock Blog and in my new weekly commentary that focuses on a key theme likely to shape markets in the weeks ahead.

Here’s this week’s chart below. It helps show why current low levels of stock market volatility look unsustainable; or, in other words, why now is a good time to prepare portfolios for a rockier road ahead.

Equity Market Implied Volatility

The Federal Reserve’s (Fed) quantitative easing (QE) program—twinned with liberal doses of QE by other central banks—dulled market volatility to unprecedented low levels between 2012 and 2014. This period of exceptionally low volatility ended last year, as the Fed wound down its QE purchases and began to raise rates.

However, as evident in the chart above, markets have become eerily quiet recently. U.S. equity market volatility, as measured by the VIX Index, is hovering around its lowest level since August 2015 and is well below its long-term average. This unusual calm follows declining market concerns about sliding oil prices, and the health of European banks and China. I do not expect this calm to last, and I see a return to the higher-volatility regime that was the norm prior to QE.

Why? The future path of monetary policy remains uncertain, and tail risks remain. A big Chinese yuan devaluation isn’t BlackRock’s base case, but it’s still a downside risk. Geopolitics, particularly as Europe confronts terrorism and migration, could also spark volatility. So, too, could rising global and U.S. inflation expectations.

How can you prepare? Gold can be an effective hedge if volatility spikes due to rising U.S. inflation fears, according to BlackRock analysis. I also like Treasury Inflation-Protected Securities (TIPS) and similar instruments. For more on what to watch in the week ahead, be sure to read my full weekly commentary.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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