The world became a very uncertain place in the last week. This means more risk in many aspects of our lives, especially markets. For the last decade or so markets seemed to only go up, but since the pandemic, risk became a bigger issue. The figure below is the 3-month implied volatility from the S&P 500; it shows how volatile investors expect markets to be over the next 3 months based on options prices. We see a big increase in the early days of the pandemic, before settling into a higher range. Between uncertainty around Fed policy and events in Europe, we can expect even more volatility going forward. Many households came out of the pandemic with more wealth than before and this fueled the recovery. But if markets stay so volatile, their 401(k)s will take a hit and people will start to feel much less secure.
Source: FRED
Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.
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