Economic Growth: Ghost Of Crises Past

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Economic Growth: Ghost Of Crises Past

Economic Growth: Ghost Of Crises Past by Jay Leopold, ColumbiaManagement

  • The market’s extended period of low volatility was shattered in the past month.
  • While it is possible fear-driven selling could resume or accelerate, we do not believe this is the most likely outcome.
  • Given the U.S. economy’s reasonably good fundamentals, we believe that patient investors will get more treats than tricks in the future.

As a child I always loved Halloween, especially carving pumpkins, trading candy with my sister, and touring haunted houses. It has been a little less enjoyable to watch the ghosts of past crises resurface recently, creating fear in the hearts of some investors after an extended period of calm. But for investors with a longer-term horizon, there may be more treats than tricks in the future.

Economic growth and the capital markets experienced an extended period of low volatility in recent years. As a result, a sense of complacency had been building among investors. Historically, these periods of low volatility can last a number of years as seen by the VIX Index (a measure of expected volatility in the equity markets) between 1993-1997 and 2003-2007 (Exhibit 1). This environment was shattered suddenly in the past month.

Exhibit 1: CBOE Volatility Index, October 15, 2014

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