Era of Low Volatility Will Unwind Formulaically

Sir John Templeton, the pioneer in global mutual funds, once said “the four most costly words in the annals of investing” are “this time is different.” That should resonate with monetary policy makers and institutional investors grappling with the causes, impacts and risks of the lowest market volatility, by far, in the era of modern finance.

As this cycle of exceptional stability grows longer, there is temptation to conclude that low volatility is a permanent characteristic of markets. This time is surely not different, however, and the risk-taking that hinges on such an assumption is highly vulnerable to the inevitable episode of market disruption.