Why the Central Banks Backstop Is Working

Russ discusses how central banks once again have investors’ backs.

The global economy continues to struggle with sluggish growth. Trade frictions have not erupted, but nor have they been resolved. Iran just seized a British tanker and BlackRock’s Global Index of geopolitical risk just hit an all-time high (see Chart 1).

The reaction by investors? Drive volatility down to a three-month low.

While recent behavior could easily be interpreted as complacency, there is another explanation. Central bank liquidity — and the promise of more — is dampening volatility, as it has for most of the past decade. More importantly, this can continue.

Back in May, when volatility briefly spiked, I suggested that easing financial conditions would mitigate any rise in equity volatility. Since the peak in early May, the VIX Index has fallen about 40%. Going forward, while volatility can spike with headlines, tweets and shocks, the pivot towards easier money is having the desired effect.