The low volatility mystery is solved, Credit Suisse says

It’s a single of the most typical questions on Wall Street: Where has all the volatility gone?

Between D.C. drama, geopolitical uncertainty encircling North Korea and President Donald Trump’s tweets, investors experienced ample reasons to hit the sell button. But 2017 is usually shaping up to come to be one of the least volatile years on record.

And according to a new report by Credit Suisse, big market movements may not return anytime soon.

The firm says the market’s lack of volatility is the result of stocks moving independently of 1 another, a dynamic broadly referred to as correlations. According to Credit Suisse’s study, three-month correlations on the market have fallen to their lowest level since 2000.

“The extreme sector dispersion explains why index movements have already been so muted this season, as the market has seriously been driven simply by sector rotation,” wrote Mandy Xu, chief equity derivatives strategist at Credit Suisse and writer of the report about sector correlation breaking down.

In other words, as the market appears relaxed on the surface, many stocks and shares are seeing big movements independent of 1 another; however, those movements in single shares cancel one another out if they are grouped right into a broader index, leading to muted daily market movements.

Xu points to taxes reform uncertainty and buyers being caught off guard in the latest sector rotation due to the drivers of low correlations on the market. According to the strategist, so long as shares continue shifting independently of every other, the broader market will remain calm.

“If this continues, expect to remain in a minimal volatility regime for longer,” she added.

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