THE NEW NORMAL
By now, we have all seen and lived through some of the most volatile markets since 2011. While 2011’s volatility was due to the first Euro sovereign debt crisis, this year’s variety comes on the heels of China’s currency devaluation and the global slow down implied by these actions. The implications from these concerns are wide ranging and has potentially impacted all asset classes. Equities have so far borne the brunt of these are concerns, with the VIX topping 40 a week ago, over 3 times higher than where it stood at the start of August. Some of the headlines generated by the equity markets included an opening plunge of over 1,000 points on August 24th, which has been followed by 200+ point daily moves in 6 of the past 8 trading days. Oil has been a litmus test for global growth all year, and we have seen both Brent and WTI retest their YTD lows only to be followed by the largest rally in 25 years at the start of the week. This has been subsequently followed by an almost complete reversal the following day (we are currently at last Friday’s levels as we write this). Whether this level of acute volatility is the new normal during strong risk-off periods has been a growing concern for investors all year. For our part, we are in the camp that this is the new normal as the currents created by central bank policy, evolving liquidity dynamics and changing global reserve management makes their way through the investment process. Our observations are that while we have been aware and discussing each of these issues in isolation over the past year, China and Fed rate hikes amid growth concerns has been the catalyst needed to expose the current market structure.