2019 Predictions You Can Bank On: A New Norm For Volatility
With all eyes on the immediate issues we face as investors, it’s important to keep one eye on the bigger picture. 2018 was a mess. But 2019’s fate hasn’t yet been written.
To make sure we remain focused on this longer-term outlook, we’re going to focus on a few realistic predictions we can make now, in January, about the rest of the year.
Over the next few weeks, we’re going to try to boil down 2019’s outlook with the best information we have today. That’s the key to making any kind of prediction, using the best available information and analysis.
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Let’s get into the kinds of predictions this information is showing right now for 2019…
Politics Be Damned
This should go without saying, but it’s crucial to understanding everything else we’ll face in this new year: volatility’s previous ceiling will become its new floor.
It’s clear that there are a number of reasons we’ve experience extraordinary volatility of late. We have a federal government in shambles, split in two by the parties and very little actual governing going on. This political strife is most definitely a major source of the unease investors are facing these days. 2019 won’t be any easier on this front.
Democrats took over the House of Representatives a few days ago. That gives them subpoena power. Meaning those investigations we’ve read so much about over the last two years of President Trump and his cabinet are only going to make more headlines this year.
This split Congress also means, and I know it’s hard to believe, even more gridlock in D.C. While the Republicans previously worked pretty much in lockstep for the last two years (with a few outliers like the late John McCain’s famous thumbs down to healthcare reform), Democrats and some less faithful-to-Trump Senate Republicans will cause even greater problems for Senate Majority Leader Mitch McConnell and President Trump.
The Slow End to the Global Economic Recovery
While we’re making predictions about the causes of volatility in 2019, we can’t ignore the global picture. For a solid decade, following the financial crisis of 2008, we’ve seen economies from Brazil to Germany and India to China take off.
There have been bumps in the road, like European debt crises and unchecked Latin American inflation. But, for the most part, it’s been a relatively one-way ticket to higher financial numbers across the world. That started to end in 2018. It will continue in 2019.
The problem isn’t so much that it will end, which could take several years to play out. The real issue is that those bumpy parts during the ride up will look like freshly paved roads on the way down. Exacerbated by the likes of the trade war and Brexit, these bumps turn into country-sized potholes.
That extra volatility will become normalized, which brings us to the final big prediction about volatility today…
Raising the Bar on Volatility
In investing, the word “volatility” means something slightly different to each person. For the opportunist, it means opportunities to pick up some steals. For the conservative, it means disruption to long-term wealth building. To traders, it means a higher cost of doing business.
So, instead of redefining the word or signing onto any of these views of it, let’s look at the actual numbers they all use to count volatility.
The CBOE Volatility Index, or VIX, is the most commonly used indicator of current market volatility. It uses the change in option premiums to judge how worried investors are at the current moment about abrupt changes in stock prices.
The methodology aside, it is a long-used and well-tested indicator to view the current state of uncertainty.
As you can see there are always small one-week periods where the index gets out of control. These are usually crises like, well, government shutdowns and elections. But notice the trends.
Since the market has begun its fall in October, the VIX has gradually veered northward. The last time it sustained levels above 20 for any real amount of time was the buildup to the 2016 election.
Our prediction is that it will continue this rise above 20 and stay there for most of 2019, creating a new bottom for volatility.
This does two things for regular investors like us. First it makes those wild record-breaking days in point movements in the Dow a much more common occurrence. Secondly, it makes options much more expensive. So, if you happen to use options to hedge your portfolio, expect to pay a higher price. If you sell options to collect income, 2019 might be a very good year for you.
We’ll continue to make and track predictions here for 2019. In the meantime, we’d love to hear any you have for this new and strange year of investing. Shoot us an email at NewsDesk@netgrowthmedia.com and let us know what you see coming down the road.