Volatility on Wall Street has undergone a record decline in recent months but Merrill Lynch Wealth Management’s Bill O’Neill warns investors not to become complacent.
The VIX (Volatility Index) for the S&P 500 has demonstrated a 65% drop since September 2011, a falloff which the chief investment officer for Europe, Middle East and Africa says amounts to a record two-quarter decline.
Similarly, equivalent measures in Europe and Hong Kong are showing signs of reduced volatility, according to O’Neill.
He warns geopolitical tensions could inject further volatility into commodities markets and investors should take the opportunity to consider assets designed to dampen volatility.
“The price of equity volatility several months in the future remains elevated. Bond volatility, as measured by the Merrill Lynch Option Volatility Estimate index, has jumped around 25% from its March lows,” he explains.
“Uncertainty associated with Iran tensions and high crude oil prices could spark higher commodity volatility.”
Investors should be inclined to consider the US dollar under these circumstances as it “typically rallies in the flight to safety”, O’Neill adds.