What is Volatility?

Key Points

• Volatility is a technical measure of the change of returns for a particular asset or market index. It essentially is a means where big swings in either direction are statistically captured when it comes to the asset or index in question.
• When these movements become violent, the market is often described as being a volatile market. For assets that experience higher levels of volatility, the associated risk increases because of the unpredictability of the price.
• Volatility is typically higher during shorter time periods but smooths out over a longer horizon.
• It is important to understand what is driving the short term volatility. If you feel like this is more noise than any fundamental change, volatility can present an opportunity to add positions or round up current holdings. 

What Drives Volatility?

Political Changes/Economic Data

A change in the political landscape can have an impact on the markets when it comes to volatility. The government will be responsible for fiscal policy such as corporate tax rates and what regulations will be implemented or removed for the economy as a whole or even just a particular sector. 

Just the rhetoric itself can cause swings in the markets or perhaps negative news is released regarding a company’s business practices prompting a probe from the SEC.

Economic data depending on whether or not it is positive or negative can also be directly correlated to violent swings in the market. 

A poor jobs report, inflation, consumer and business confidence or a drop in GDP growth can cause investors to act based upon some of the current positions in their portfolio. 

On the contrary, positive reports can also cause equity markets on the whole to increase in value. Certain economic data can also be sector or industry specific and prompt a sell-off or reallocation into the specific sector/industry in question.

Company Earnings and Business Outlook

A company that experiences a poor quarter and falls short of earning expectations can also be subject to volatility as investors determine whether or not they want to continue to be a holder of common stock for the company. Likewise, the business outlook for a particular company could be unattractive due to various factors causing a sell-off or maybe revenue growth has begun to slow despite beating earnings estimates. 

However, it is also possible the opposite could occur as well where a company severely beats earnings expectations or the business outlook looks very strong. In these instances it is possible for the stock to appreciate drastically outside of the standard deviation.

This Up and Down Stuff is Normal. Be Long on Great Companies

Volatility in the market has and always will be a standard norm and should never be a reason to go into a state of panic for investors with a long-term strategy. 

Volatility can present investment opportunities for names trading at a lower price which will allow you to decrease your average cost-per-share by purchasing more shares at a discount. 
Investing for long-term growth in equity is a proven investment strategy historically and as long as investors understand Why Investing in Leadership Matters and Why Business Outlook can correlate to positive returns; then please do not fear because It Goes Up & Down..Volatility? Do Not Panic!