Thoughts in Charts: A Bumpy 2nd Year
Are we in for a bumpy recovery ride? The above chart shows the average implied volatility on the left axis during the second year of a bull market, which is represented on the bottom axis.
March 23rd will mark the 1-year anniversary of the COVID-19 market low and the start of a new upward bull market environment. Year two of a bull market is about to begin. History suggests that volatility tends to really pick-up a couple months into the second year. If it holds true for this recovery, then May, June and July of this year could see above average volatility.
Our typical portfolio design factors in long-term volatility expectations, although short-term volatility can become a very big distraction. The drama of “the best day” and the “worst day” headlines can cause a significant amount of anxiety. But according to this chart, by the end of the second year, average historical volatility seems to taper down.
Every recovery has its own path, but it can be a relief to know that the bumps aren’t unexpected.
Weekly Market Recap, JP Morgan Asset Management. March 15, 2021. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/weekly-market-recap-us.pdf
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