Low volatility in context
The FT's capital markets editor and Christian Mueller-Glissmann, multi-asset strategist at Goldman Sachs, explain how periods of low market volatility have occurred in history and do not necessarily suggest an upcoming negative cycle.
Produced by Alessia Giustiniano. Filmed by Filip Fortuna.
In the terms of market volatility, it is quiet. But is it too quiet? To help us answer that question, we are joined by Christian Mueller-Glissmann, who is a multi-asset strategist for Goldman Sachs. Thanks for joining us, Christian.
Thanks for having me.
So give us the context. Markets are very quiet in terms of volatility, but just how quiet? are they in the longer term context?
No, I think you're absolutely right. Volatility across assets is very low right now, and in particular for equities. So what you see here is a 100-year history of S&P 500 realised volatility. And you can see we're at the very bottom of that range right now.
And that shows you that things are very quiet. The key question to ask is, of course, too quiet. And the interesting thing is most people think that when volatility is low, there's a risk of complacency. And it's quite unusual to have low volatility.
But what we've found looking at the last 100 years is there are several periods in the past where volatility was low for very long. And the best example are the '60s, where you can see volatility was really low for more than four years, but also the '90s, where volatility was very anchored. And usually, these are not periods to worry about, necessarily. They actually just reflect a very strong, stable market.
So some of these you can see a war came along and markets freaked out. And then sometimes, we had something like the oil shock in the '70s. But other than those obvious shocks to the system, what else causes markets to get a bit more excitable?
I think it's somewhat simple. Volatility tends to be incredibly low and anchored if macro is good. And in this periods in the '60s, in the '90s, and right now, you've had very strong macro. Global growth was running about 4%.
You have rates being anchored. You have inflation being anchored. So you could even talk about the very popular Goldilocks scenario, which is very supportive for risk appetite. So if you have that positive macro, usually, volatility can be anchored.
And you're absolutely right. There's always the risk that you have large shocks which snap you out of this low volatility environment, and it's tough to predict those shocks. And generally, forecasting volatility is very tough. But having a good macro is already half the rent to talk about local volatility.
So we've got the global economy is growing, business confidence is good, corporate profits are rising. So that's all great, really. We should expect this to carry on.
I think there's, on top of that, one factor which has helped us in the last 12 months, for example, which is central banks. Because if you do look at equity bond correlations, they have been very negative in the last 20 years or so.
And this is quite unusual, because it used to be what was bad for the bond market was good for stocks, and vice versa.
Exactly. This is 200-year history. And you can see this is the longest stretch of negative equity bond correlations. So every time equity is correct and there's equity volatility, bonds are actually buffering, to some extent, at volatility. And this has come to the fore with the central bank put, where in 1987, you had Greenspan, when he took over the Fed, dealing with Black Monday, which was a huge crash in the equity market. And he injected liquidity to mitigate the volatility.
And I think since then, central banks have been very helpful for markets to buffer volatility, in particular for smaller shocks. And when you think about Brexit, that's exactly what happened. You had a big uncertainty shock. Markets initially reacted very badly.
But then you had the central bank being incredibly easy in buffering. You had the currency react, and that stabilised things very quickly. And the central bank put has been integral to actually anchor volatility as well.
So what happens now, though? Because one of the big topics which I think everyone in markets is thinking about is this potential movement towards tighter monetary policy from, it seems, most of the world's big central banks.
No, I think that's the key question right now-- are we changing the monetary policy regime we're in? I think since the '80s and with the collapse of Bretton Woods before that, you've really seen central banks shifting towards buffering the business cycle.
And I think the question is if, right now, you're going through a period where central banks are keen to tighten these ultra-easy financial conditions and also build up a buffer for future potential recession. And they might do that at the cost of less growth.
But I think it's too early to abandon the monetary policy regime we know. We think we might go through a near-term period of volatility as the market has to digest slightly higher rates. But what we've found historically as well is as long as growth is good, usually the market can deal with higher rates. And I think that's what central banks are hoping as well.
Financial conditions are very easy right now. Growth is good. They're normalising policy for good reason. And that shouldn't drive a sustained period of volatility, really.
That's great. Thank you very much for joining us, Christian.