Market volatility is likely to be marginally higher. While volatility fell over the course of August, the VIX’s daily average for last month was approximately 15% higher than its average over the previous three months.
Market Realist – Volatility in the U.S. markets (SPY) has been ticking up constantly in 2014. The previous graph shows the uptick in the VIX index levels (VXX), which measure the volatility of the S&P 500 (IVV), in August 2014.
To the extent strong economic data continues, one side effect is likely to be a heightened focus on an initial rate hike by the Federal Reserve (or Fed). Marginally tighter monetary conditions, and market expectations of Fed policy tightening, are likely to support the trend toward somewhat higher volatility.
Market Realist – The bond (BND) buying program of the Federal Reserve, primarily involving the purchase of U.S. ten-year Treasuries (IEF), is likely to end in October of this year. As per the Federal Open Market Committee, interest rates are likely to go up in the first half of 2015 if the economic data remains strong.
Read on to the next part of this series to see how Ukraine tensions could shore up volatility and for the key takeaway for investors.