The start to 2016 has been a wild ride for investors in the markets and it might be a sign of what’s to come.
According to Todd Hawthorne, the lead portfolio manager at Boston Partners, the swings and volatility in the stock market of the past few days is going to be the new normal for 2016.
“This is a resumption of normalized volatility behaviour, and I expect it is what we’re going to see going forward,” Hawthorne told Business Insider.
Hawthorne’s firm has $72 billion in assets under management.
Hawthorne, who specialises in managing volatility, believes that despite the common assumption that more swings are bad for stocks, this is actually just a return to normal. He notes that the long-term average of the VIX index, which tracks volatility in the S&P 500, is about 20 (according to the CBOE, which developed the index, its average since 1990 is 20.02).
In the past three years the VIX has settled in a much lower band, said Hawthorne, spending a majority of the time between 10 and 15. In comparison, the VIX this week has been between a low of 25.43 on Tuesday to a high of 31.95 on Wednesday.
So while this week is above average and one of the more extreme movements of the market in a while, after years of dampened volatility this may be a regression to the mean.
Hawthorne believes that both fears about China and shaky energy stocks should contribute to the higher volatility this year, but argues that the main culprit is the Federal Reserve.
“The premise of a backstop from the Federal Reserve is gone,” Hawthorne told us.
“The doctrine of zero interest rates changed the way that people evaluated risk and there wasn’t as much downside risk, which kept volatility lower.”
This means, in Hawthorne’s opinion, that bad news or good news will have more impact on stocks.
“There are now going to be sharp reactions to news. As the news flow comes in people are going to react to that more significantly and it will move markets more than in years past,” Hawthorne said. He pointed to Apple as an example.
The stock has skated lower over the past few weeks on news about cuts and disruptions in its supply chain. Hawthorne noted that this isn’t a new phenomenon — these issues were reported last year as well — but now with interest rates on the rise, investors have “shifted their understanding of risk” and reacted differently.
This leads him to believe that individual stocks, along with the rest of the market, are going to react more dramatically going forward. Not that this is bad news, said Hawthorne; in fact it may end up being a positive for many financial institutions.
“The resumption of a normal level of volatility and risk is a positive,” he said. “It’s very hard to get people to invest in asset managers when you can just get the same return by putting your money in an index.”
For mum-and-dad investors, however, it may be a bit more difficult. While there will be more stocks outperforming, it will take more focus to find the right names.
“If you’re just sticking your money into the market, it’s going to be harder,” he said. “The indexes won’t be the place to be.”