Volatility to Remain

Terry Flanagan

Despite a drop off in market volatility in recent weeks, market participants predict a return in the coming year.

“Volatility is here to stay,” said Richard Perrott of Berenberg Bank. “The market is getting very anxious about the possible outcomes. The perception of a European default, within global economic community is potentially very disastrous. The slowdown in the U.S. economy is also impacting anxiety in the marketplace, increasing the crisis on confidence.”

As the ongoing debt crisis in Europe continues to weigh down investor confidence, amid a backdrop of a still-struggling U.S. economy, market participants warns investors that volatile times lay ahead. Political uncertainty, high oil prices, slowing growth and low interest rates will continue to weigh down investor confidence and stifle investment returns.

Despite the grim forecast, the potential for growth is there.

Bank of America Merrill Lynch anticipates that global equities could rally by 10% next year from current levels, aided by liquidity, modest earnings growth and cheap valuations.

Volatility has been on a wild ride in 2011, as the CBOE Volatility Index has shown. Two and three percent intraday swings have become the norm. The surges have come in the wake of a slew of macroeconomic events, including the European debt crisis, the U.S. debt downgrade, and the collapse of MF Global. The VIX reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. It then fluctuated from the low-30s to the mid-40s in the following months, surging as European debt concerns weighed on investors and declining as hopes for a potential resolution surfaced. In late October, the VIX had declined to as low as 25. As of mid-day Jan. 3, the VIX was trading at about 22.

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