'Several regime shifts are happening at once' - Here's why the recent turbulence in markets is the new normal

'Several regime shifts are happening at once' - Here's why the recent turbulence in markets is the new normal

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Reuters / Lucas Jackson

  • Markets around the world have been whipsawed in recent weeks as risk assets have sold off sharply and then recovered on multiple occasions.
  • This behavior suggests volatility is creeping back into markets, which could throw some investment strategies out of wack.
  • Bernstein says "several regime shifts" are responsible for the recent uptick in volatility, and explains how they'll continue to cause big, sudden moves.

No matter how you slice it, recent market turbulence has been a serious shock to the system.

Major indexes fell for six straight days, surged for one single session, dove sharply again, then seemed to stabilize on Friday.

But that description hardly does the roller coaster ride justice. Each trading session contained a breathtaking series of twists and turns. Deep losses were pared, then extended again. On the strong days, there were multi-hour patches when those gains looked quite precarious, and were even temporarily erased.

All of this leads to one grand conclusion: volatility appears to be back. And it could redefine the trading environment as we know it.


To best understand what's occurred in markets, it helps to zoom out a few years and assess the wider volatility landscape. While sluggish index moves in either direction became the norm over the past couple of years, that wasn't always the case.

The chart below of the Cboe Volatility Index, or VIX, shows this dynamic in action.

The exact numbers show it all.

Since the start of 2016, the VIX has traded at an average level of 13.98, well below the gauge's bull market average of 17.90. Volatility was especially subdued during 2017, when the VIX averaged 11.10. And all of this is markedly lower than the VIX's all-time historic mean of 19.33.


To hear Wall Street experts tell it, suppressed volatility may soon be giving way to larger moves, with the action of the past couple weeks serving as a jarring dry run.

"Several regime shifts are happening at once," Inigo Fraser-Jenkins, the head of global quantitative and European equity strategy at Bernstein, wrote in a client note. "We should expect volatility to default to a higher level. So, we can expect more episodes like last week."

But what kind of regime shifts? Fraser-Jenkins breaks it down:

  • The exiting of QE to less accommodative monetary policy
  • The transition from high growth to slowdown, at least partially driven by higher bond yields
  • Profit margins are rolling over in the US after a period of remarkable strength
  • A decoupling of the most synchronized period of global growth in 50 years
  • Mounting risks of trade wars and other political conflicts

It's important to note that this isn't necessarily an outright negative for markets. It just means they'll be moving more. Gains will be even more glorious, and the pullbacks will be more frequent and severe.

As such, Fraser-Jenkins thinks the market weakness seen in recent weeks will be a fleeting affliction.


"We should expect the default level of vol to be higher," he said. "However, in the absence of evidence of euphoria we do not think that the market slide continues in the near term."