No, Washington Is Not to Blame for the Volatility

Many are pointing a finger at Washington for the recent spike in volatility. But, as Russ explains, the catalysts lie elsewhere.

After more than a year of metronomic, almost tedious gains, volatility is back. Since the start of February equity volatility, as measured by the VIX Index, has averaged nearly 21. While still barely above the long-term average, the new regime represents a significant departure from 2017, when the VIX averaged barely 11.

For investors this raises three questions: why now, will it continue and what to do about it? Starting with the first question, the most common response is to blame Washington, namely concerns around trade and the potential for increased regulation of the big tech companies. My own view is that policy uncertainty is a headline, but not the culprit.

As discussed last August, the relationship between policy uncertainty and markets is weak. In addition, it is not clear that policy is all that uncertain right now (see the accompanying chart). While there are potentially serious issues surrounding U.S. trade policy, for the first time in years there is clarity over corporate taxes.