Market Uncertainty: The Blanket Excuse

Breaking down the volatility and 'uncertainty' chatter

Jun 8, 2015 at 10:36 AM
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I know I harp on the overstatements of volatility in financial media, but I’m pretty sure it reached a crescendo on Thursday afternoon. So help me, I heard a guest on CNBC talk about increasing vol about every 10 seconds.

The Nasdaq chair even came on and noted the uptick in vol and predicted higher vol ahead -- and then proceeded to contradict his argument by pointing out that 100-pt moves (in the Dow Jones Industrial Average, I assume) aren’t as meaningful now that price levels are this high. I take that all to mean that yes, we’re really volatile, if you take the absolute gains and losses in the indices of today and relate them to the absolute levels of the indices 20 years ago. Which, of course, makes perfect sense.


That’s not to say there’s not actual actual volatility out there. Currencies are flying all around. The euro exploded mid-week, then the dollar bounced big on Friday. Euro bonds are going a bit nuts, and our bids have picked up vol steam as well. And it's certainly not beyond the realm of possibility that it all eventually sloshes over to our stocks.


It just hasn’t yet, despite what they keep telling us. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had a somewhat ugly week amid a rather churning and frustrating year. But it did not have a day last week with a greater than 1% top-to-bottom range, though Thursday was almost exactly 1%. A volatility of 16 implies that two-thirds of days have ranges within 1%. So, we’re talking a peak of about 16 volatility on a week we can’t stop talking vol.


If 16 VIX is our new standard of big vol, then I suppose I’m entirely wrong, and volatility is back in a big way! But I suspect no one thinks that; 16 vol is modestly high vs. what we’ve seen these last few months, as it's far from a moon shot.


Again, the euro and euro bond vol could transfer to U.S. stock vol. There’s also about 1,000 reasons why vol can go higher. And, of course, it will go higher; it always does eventually. Which brings me to another pet peeve: “Uncertainty."


Uncertainty is always the blanket excuse for everything. It's why we can’t buy stocks (uncertainty about the timing of rate hikes), why Company X is underperforming, why the Mets never sign good free agents, et. al.


And it's an excuse that’s beyond ridiculous. There’s. Always. Uncertainty.


If there wasn’t uncertainty, options volatility would be about zero. Every stock would be perfectly priced, so why do we need options? In fact, I could make the case that the CBOE Volatility Index (VIX) is as good a gauge as any for the level of actual uncertainty. The higher the VIX, the more uncertainty going forward. If VIX is 13, people aren't all that uncertain about future interest rate hikes. Or better: They’re not all that worried about the timing of the hikes.


But I know I’m talking to a wall on this. Constant features about the imminent rise in volatility are here to stay. It doesn’t mean they’re right. I mean, one of them will be very well-timed, most others will not. It's just a standard part of the financial conversation that isn’t going anywhere. 


Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research




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