Lead-Lag Report: This Bear Market Is Different

The word volatility gets thrown around a lot during a market selloff. However, volatility can simply mean how much an asset class moves, not necessarily its direction up or down.

For years, central bank activity has helped to hold down volatility. But now, with the economy slowing and interest rates rising, volatility is on the rise. The result? What has appeared on the surface as a calm market has given away to a rockier one.

Some traders have viewed volatility as an asset class, thanks to the rise of products that try to track it. However, volatility is derived from other assets, typically stocks and bonds.

Traders have embraced volatility, as shown by the rise of options trading relative to stock trading. However, with more access comes a higher chance for riskier trades that can blow up.

Meanwhile, interest rates are coming off record lows. Higher rates for the cost of capital are lowering expectations for a number of assets. Companies that made sense at low interest rates may not with the cost of capital is higher.

That makes this bear market potentially different. Changing views on asset classes as interest rates rise may lead to a further selloff. But it may not mean further volatility. That may make it harder to pinpoint a market bottom.

The overall combination could mean a potential worse-case outcome for all assets.

To listen to the full interview looking at how this bear market may be different, click here.