Calm Before The Storm In Market Volatility

Market Vitality Increasing

The stock market DOW seems to go up almost every day with the election of Donald Trump as President.  The big picture analysis given in our other article indicated otherwise.  The “Trump” peak will soon meet the reality of being overvalued.  In this article, we probe the question:

While stock markets have been thriving so far on low market volatility, geopolitical events will drive volatility higher.  What are our investment implications?

It is well established that DOW thrives on low market volatility as measured by VIX.  Do you think recent low volatility will continue to last this year?  Do you think Trump’s policies and current global turmoil will not affect market volatility?

Forecast of Market Volatility (VIX)

We performed a special cycle analysis on VIX based on Fourier transformation.  The results indicated a rapid rise of market volatility from 2017 to 2020.  The increasing volatility will have dramatic implication on various asset classes.

Impact of Increasing Market Volatility

We examined the correlation coefficient of increasing volatility with various asset classes.

DOW Index And VIX

As noted in the chart, DOW and VIX are highly anti-correlated.  DOW equity rise will soon top and begin to fall with increasing volatility in 2017.

US Dollar And VIX

There is a similar anti-correlation relation between US dollar and volatility.  We have performed a cycle analysis on US dollar in another article, indicating a downward pressure on US dollar.  The weaker dollar policy of President Trump in order to bring back manufacturing jobs and make our products more competitive abroad will lead to a weaker dollar, despite potential interest hikes.

GOLD And VIX

Gold is positively correlated to some extent with VIX.  Again, our separate cycle analysis of gold showed a dramatic rise in gold price in 2017 and 2018.  With monetary crisis and global financial and geopolitical turmoil, gold and gold stocks are more attractive investments than equity and bonds.

Challenging Environment In 2017

We conclude our analysis by comparing our favorite inflation indicator of the long bond (30-year) to immediate bond (10-year) yields with market volatility.  That is, we compare Ratio (^TYX/^TNX) to VIX in the following chart:

Our conclusion is that we are entering a challenging environment of high market volatility and increasing inflation this year.  We will need wisdom in our investments.