What a Difference a Year Makes

Does anyone remember August of 2015? You were likely on holidays enjoying some well-deserved sunshine. However, in hindsight, it turned out to be one of the greatest flashing blue light specials that the market has put on in quite some time. Below we highlight some of the happenings from a year ago, and what is different today.

First, what happened last year around this time? Below is a snapshot of the S&P 500:

Source: VIP Wealth Solutions & Bloomberg

In a time frame of about 4 days, the S&P 500 sank from about 2,100 points to a low of 1,867 which is approximately an 11% decline. This is interesting, but there was another factor that was perhaps more interesting as a backdrop against what we are seeing today.

Volatility is a bit of an abstract concept, but an important component for market watchers. Here is what the volatility index did in August 2015. It really spiked, no I mean really spiked.

Source: VIP Wealth Solutions & Bloomberg

We are talking a move from about 12 points to over 50 points intraday on the 24th. Our chart above only shows the closing level of the index.
So what has changed? Market Kum Ba Yah! Maybe like all Girl Guides we are just sitting around the campfire singing that old song and drinking hot chocolate. Why so rosy, warm and cuddly? Good question.

Volatility has gone to sleep, maybe one too many s’mores. Here is a snapshot of our current volatility environment since last year.

Source: VIP Wealth Solutions & Bloomberg

We are now back at, or near all-time lows. Why? Maybe we can call the FED and ask them. They have managed to keep us on the edge of our seats with every meeting, and the anticipation of higher rates or the sound of the can being kicked down the road again. Most of us have played the game as kids and remember the sound of the can skipping down the road. At some point, the game gets a bit boring and you kick it harder and it goes into the street. Typically, the outcome is into traffic. Worst of all, it gets run over by a car and gets flattened. Will this happen with the FED? Impossible to say. However, volatility is a suspicious bedfellow and it will not take much to wake him up.

Why is this important? When volatility wakes up, there are opportunities abound. All those names we are looking at that we wish were cheaper almost instantly become so. Consider the TSX in August of 2015. The index drifted from about 14,500 points at the start of the month to a low of 12,700 points which is about a 12% decline in 24 days. Royal Bank went from $76 to $68. Good solid pullbacks.

Is the volatility train on the tracks and heading our way? Yes! The biggest question is when it will arrive? For now, it’s Kum Ba Yah, but at some point, the s’mores fall into the fire and the Girl Guides stop singing.

Is there protection against this and can it be managed? You betchya. There is not a perfect solution, but there are a few tools in our toolbox that are ready for implementation once the can gets kicked into traffic. Will we buy at the bottom and sell at the top? Not a chance, but we will and can keep the warm blanket around ourselves and enjoy the fire.

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