Yesterday we profiled correlations; today, we update volatility.
In preview, vol is up, which is to say that it’s no longer down, as it was for several years previous. The bear market in volatility ended in late 2006/early 2007, as our chart below reminds. As it happened, the windup in vol’s decline preceded the start of the bear market in equities. If you’re thinking that volatility’s nadir was a clue of things to come, you’re right. In fact, we considered no less in the recent past, including this post from January 2007, when we advised, after a long spell of falling standard deviations: “Higher volatility is probably coming, one day, and history reminds that sometimes higher volatility is forged by falling prices.”
But that was then. What of the future? As always, we can only guess. Fortunately, we can also learn from history. No, not everything is revealed by looking backward, and certainly not with full clarity about what’s coming. Still, Mr. Market leaves a few crumbs of insight about the morrow.
On that front, volatility at the moment has little to tell that we don’t already know. Yes, standard deviations in the major asset classes are rising, as we suspected they would after reaching unsustainable lows in late 2006/early 2007. Based on the above chart, one may expect that vol still has a ways to go, which suggests that the selling isn’t about to dry up just yet.