Analyzing Market Volatility

If you went to sleep on April Fools’ Day and checked your investment portfolio a month later, you might have assumed the market had been relatively calm. After all, the S&P 500, an index of the largest US stocks, ended the month down a modest 0.7%. For investors who spent the month with their eyes wide open, the experience likely felt more disruptive. April turned out to be one of the most volatile months in recent history. Every day, it seemed, market participants were learning new information about tariffs and trying to make sense of what the developments might mean for businesses, investors, and the global economy. The Cboe VIX Index, a measure of US stock market volatility, closed above 50 in early April. The last two times the VIX closed above 50 were the global financial crisis of 2008–09 and the early days of the COVID pandemic in 2020. On eight separate days in April, the S&P 500 moved at least 2 full percentage points. The steepest single-day drop was around 6%, while the largest single-day gain was almost 10%. Imagine you had $1 million invested. You might have lost $60,000 or gained $100,000 in a single trading session—with no idea what the market would do the next day. April’s ups and downs were enough to make anyone’s head spin—unless you were able to keep things in perspective and tune out the noise. For decades, I’ve been advising people to develop a sensible, long-term investment plan that you feel good about and can stick with during tough times. I'm also a realist. And I’ve learned that months like these are a good opportunity to sense-check your comfort level when it comes to dealing with uncertainty. If your stomach felt like it was twisted into knots, you might want to consider talking with a financial advisor about making adjustments to your asset allocation. Perhaps you want to reduce the percentage of your portfolio that's invested in stocks and increase the amount that's invested in bonds. It's important to make sure any changes make sense for you and your long-term plans, rather than trying to time short-term moves. That’s where a having a professional on your side really helps. Think of financial planning like a river-rafting trip. A good financial advisor, like a river guide, has been there before, knows the navigable passages, and can help you chart a course that aligns with your risk tolerance. Maybe you choose the direct route. Maybe you prefer a calmer one. Either way, your guide works with you to navigate the path that’s right for you. And while your heart rate may rise when you see the rapids approaching, you can rest assured that your guide has accounted for the risks and is focused on making sure you have a good experience. If you managed to stay in the raft throughout April’s volatility, Congratulations! By remaining calm during a volatile month, you proved you can navigate significant rapids. And despite all the uncertainty, you likely ended the month as an investor not far from where you started.

The Volatility-of-Volatility Term Structure - This paper studies the term structure of the VVIX (volatility of volatility), a measure of expected volatility changes in the VIX (volatility index). Here are the key findings: Informational Content of VVIX Slope: The study reveals that the slope, not the level, of the VVIX term structure holds significant information about vol-of-vol risk. A steeper slope predicts positive returns on S&P 500 and VIX straddles (options that profit from price movements in either direction). Importance of Vol-of-Vol Risk: The paper highlights that VVIX slope offers unique insights beyond the VIX term structure and variance risk premium (VRP). This implies vol-of-vol risk is crucial not just for VIX options, but also for stock index options like the S&P 500. Decomposing VVIX Term Structure: The research employs a model to explore the drivers behind the VVIX slope. It identifies continuous vol-of-vol and jump risk as the main contributors, with their influence varying based on economic conditions. Economic State and VVIX Slope: During calm markets (low q/V ratio), jump risk and a constant term dominate the VVIX, leading to a flat term structure. Conversely, in turbulent markets (high q/V ratio), continuous vol-of-vol risk takes center stage, causing a steeper slope. VVIX Slope and Market Downturns: Analyzing major crises, the study shows that the VVIX slope captures a shift in the composition of vol-of-vol risk. Initially, jump risk is prominent. However, as the crisis unfolds, volatility uncertainty becomes the primary driver, suggesting market participants anticipate prolonged volatility. Overall, the paper emphasizes the significance of the VVIX slope as a predictor of returns and a valuable tool for understanding the dynamics of vol-of-vol risk in the context of stock and VIX options.

Most people see a down market and worry about their retirement But sometimes a falling market could create a tax planning window. Here’s why. First, a quick refresher on Traditional IRAs Many people end up with a Traditional IRA after rolling over an old 401(k). The key features: • Contributions are pre-tax • Growth is tax-deferred • Withdrawals are taxed as ordinary income That means Uncle Sam gets paid later. But there’s a strategy that can change that. Enter: The Roth Conversion A Roth Conversion moves money from a pre-tax account (Traditional IRA) to a post-tax account (Roth IRA). You pay taxes on the amount converted today. In exchange: • Future growth can become tax-free • Withdrawals in retirement can be tax-free • No early withdrawal penalty applies to the conversion itself The goal is simple: Pay taxes now to potentially reduce taxes later. Now here’s where down markets get interesting. Let’s say Bob has: $100,000 in a Traditional IRA. Bob considers converting half. Normally that would mean converting: $50,000 → and paying taxes on $50,000. But then the market drops. Bob’s IRA falls from $100,000 to $50,000. Now when he converts half, he converts: $25,000 instead of $50,000. Meaning: • Smaller conversion • Smaller tax bill But here’s the interesting part. If the market later rebounds back to $100,000 total: Bob could end up with: • $50,000 in a Traditional IRA • $50,000 in a Roth IRA Same overall balance. Except now half of the money sits in a tax-free account. That’s the hidden opportunity. A down market can allow you to: Convert more shares While paying taxes on less money. But there’s a catch. Roth conversions are taxable income. So before doing this, you need to consider: • Do you have cash available to pay the tax? • Are your current tax rates lower than future tax rates? • Will the conversion push you into a higher bracket? Because sometimes the best move is not converting. The real takeaway Market declines feel painful. But sometimes they open up planning opportunities. One of the biggest: Paying taxes on a temporarily lower portfolio value. For the right person, in the right tax situation, that can create meaningful tax-free wealth later. Not tax advice. Just an example of how strategy can sometimes turn volatility into opportunity.

Government bonds underperformed equities, credit and commodities in this 3-year risk on market. Our analysis shows when equities sell off, Treasuries are also less diversifying compared to decades prior (chart). What’s happening? Long bond yields are made up of 2 components: ➡️ Policy path - in a world shaped by supply, central banks are more limited in their ability to come to the rescue of the economy without reigniting inflationary pressure. Hence Treasuries are less reliable when equities fall. ➡️ Term premium - it’s driven by bond volatility, inflation uncertainty, and of course fiscal dynamics. Think of it like any other type of risk premium such as equity risk premium it’s about perceived risk and additional required compensation above risk-free for holding it in portfolios. Large deficits record debt and heavy issuance mean that term premia can reprice higher, maybe especially during stress, pushing long yields up even as markets may price a lower policy path. Together, these forces weaken the traditional stock–bond hedge. I think of Treasuries now as quality income assets not the diversifiers they used to be.

Prices in calendar time cluster, lurch, and refuse to behave like the clean random walks of theory. Benoît Mandelbrot, best known for revealing the roughness and fractal nature of markets (see earlier post https://lnkd.in/eSV3mfnD), had a deeper idea: beneath the mess lies a purer process, one that would look regular if only we measured it against the right notion of time. ⏱️ He called it Trading time: a clock that races during turbulence and crawls during calm. He described its statistical properties in detail, but the exact mathematical object connecting it to standard models remained implicit. The irony is that the object he was circling had been sitting inside financial mathematics all along. It is quadratic variation - the accumulated variance of the price process. Every stochastic volatility model contains it. It has been there since Itô. And the Dambis–Dubins–Schwarz theorem makes the link exact. Take any continuous martingale, run it against its own quadratic variation and you obtain a standard Brownian motion. The clustering, the fat tails, the bursts - these are not properties of the randomness itself, but of how θ(t) relates to t. Change the clock, and the wildness disappears. The geometry of price - revealed. 🧊 Mandelbrot introduced a fractal market cube, where price is a function of both trading time and clock time (see in the comment). Financial models have always had this cube-like structure, even if we rarely draw it explicitly: 📌 Price vs trading time - the mathematical ideal. Pure Gaussian noise, where Itô calculus works cleanly. This view never changes between models, by theorem. 📌 Trading time vs clock time - the deformation. This is the volatility model. A straight line gives constant volatility. A jagged, uneven curve gives clustering, crashes, regime shifts. Heston model, rough volatility, local vol -they are all different shapes of this single mapping. 📌 Price vs clock time - the market we observe. Messy, irregular, inheriting its character entirely from the deformation above. These are not three separate objects. They are three projections of one trajectory. Rotate the geometry and each face reveals a different truth. The same path looks like clustered noise from one angle and clean Brownian motion from another. When the market crashes, it is not just falling faster - time itself is moving faster. The implications follow immediately: 💡 Calibration is not fitting price dynamics; it is reading the shape of the clock from the volatility surface. 💡 Hedging is translating between two time systems - what the market experiences vs what the model assumes. 💡 Model risk is getting the clock wrong. Two models can match today’s implied vols perfectly while implying completely different clock dynamics - a difference invisible in static calibration and revealed only when the market moves. Mandelbrot saw the pieces. The mathematics had the picture all along. It just needed to be drawn..

Anatomy of a VIX Spike   The upper chart tracks the #VIX since 1990. The orange markers represent the 100 largest single-day VIX jumps, while the grey bars show how many “5-point-plus” spikes occurred within a rolling 12-month window. Several patterns emerge:   ·        Volatility clusters around the Asian Crisis and LTCM (late 1990s), the Global Financial Crisis, the Eurozone turmoil, and the COVID shock—punctuated by quieter stretches when markets seemed almost complacent. ·        Starting with the GFC volatility spikes were more frequent and more severe than in previous decades.   The lower panel normalizes those 100 events to show the typical path of the VIX around a spike. Three phases stand out:   ·        Pre-spike calm: On average volatility trends lower or drifts sideways in the week leading up to the event, often lulling investors into false security. However, as the 90% quantile and the example of the financial crisis show, vol spikes also can be preceded by high volatility indicating that the biggest spike doesn’t have to be right at the start of the turbulence.   ·        Day 0 surge: The vol spike - a sudden repricing of risk.   ·        Persistent afterglow: Even after the initial shock, the VIX typically stays elevated for several sessions. Historically, the 90th-percentile path remains well above baseline for at least a week.   The implication is clear: a major VIX shock is rarely a single-day anomaly. It often signals a regime shift in risk perception, where option premiums and hedging costs remain higher.   For portfolio managers and traders, that argues for flexibility beyond the first spike. Tactics range from maintaining protective hedges, to harvesting rich option premiums once realized volatility stabilizes, to dynamic asset allocation that respects shifting correlations.   #investing #volatility #options

One of the most concerning developments is the growing divergence between professional and retail investors. Institutional investors have quietly reduced risk, shifting toward defensive sectors and fixed income, while retail traders continue chasing speculative trades. Sentiment surveys confirm this imbalance, showing extreme bullishness among small traders, especially in options markets. With these risks building under the surface, prudent investors should proactively protect their portfolios. No one can predict precisely when the market will correct, but the ingredients for a sharp downturn are clearly in place. Savvy investors should use this period of complacency to reduce risk exposure before the cycle turns. Here are six practical steps investors should consider: ▪️ Rebalancing portfolios to reduce overweight exposure to technology and speculative growth names. ▪️ Increasing cash allocations to provide flexibility during periods of volatility. ▪️ Rotating into more defensive sectors like healthcare, consumer staples, and utilities that tend to outperform during corrections. ▪️ Reducing exposure to leverage by avoiding margin debt and leveraged ETFs. ▪️ Using options prudently—not for gambling, but for protecting portfolios through longer-dated puts on broad market indexes. ▪️ Focusing on companies with strong balance sheets, stable earnings, and reasonable valuations. ▪️ The explosion of zero-day options trading is not a sign of a healthy market. It is a symptom of an unhealthy market increasingly driven by speculation rather than investment discipline. Retail traders have moved from investing to gambling, chasing fast profits while ignoring the mounting risks. Greed is rampant, leverage is extreme, and complacency is near record levels. Markets can remain irrational longer than expected, but history tells us these speculative periods always end in a painful correction. Bull markets do not die quietly; they end with euphoric retail excess followed by painful corrections. Investors who recognize the signs early will avoid the worst of the fallout and be positioned to capitalize when value opportunities return.

With public equity and fixed income markets in turmoil in recent weeks the traditional 60:40 portfolio model has again been challenged. There's little doubt uncertainty will pervade these markets for the foreseeable future. Therefore it is timely to release further research on the beneficial portfolio characteristics of private market assets. In this paper "Optimising private market asset allocations" we examine the integration of this asset class within traditional asset allocation strategies to  assess performance impacts across investor risk profiles. We believe that including private market assets can significantly enhance portfolio returns for investors who adopt a risk-based utility-maximising strategy in portfolio construction. Additionally, we find that unlisted infrastructure has the most potential of the private market assets considered to improve portfolio Sharpe ratios, especially for ‘Defensive’ and ‘Balanced’ investors. Our research applies a utility maximisation framework which facilitates risk appetite aware optimisation to tailor portfolios to match specific investor risk preferences and lifecycle stages. A novel two-stage returns unsmoothing approach is used to more accurately estimate true private market return volatility. We show that even after returns unsmoothing, private markets can significantly enhance portfolio outcomes. This study finds that defensive investors benefit from allocations  to infrastructure and private credit, achieving lower volatility and higher returns. Balanced investors see similar advantages with  a stable allocation to infrastructure, while growth investors lean towards private equity for higher risk-reward profiles. This analysis adds further weight to our assertion that private market assets have a material role to play in optimising investor portfolios. With IFM Investors Economics & research Frans van den Bogaerde, CFA and Christopher Skondreas #investment #assetallocation #risk #privatemarkets #portfolioconstruction

Stocks AND bonds have both been moving down over the past few weeks, just like in 2022. We call this the "ziggy problem"❗ But what is the "ziggy problem" of stock-bond correlation? And how can investors avoid the negative returns trap? In 2022, a "balanced" portfolio of stocks and bonds lost value on both the stock side and the bond side. As of Q1 2026, we're seeing a similar story play out. Why does this happen? Aren't bonds supposed to zig when stocks zag? Why are bonds not protecting portfolios right now? It all comes down to INFLATION and expectations for interest rate moves. In times when inflation is a concern for investors (and for central banks), we see positive correlation. Stocks and bonds tend to move together. We've seen this before: 📌 1970s-80s (stagflation)... 📌 2022 (COVID/stimulus causing inflation) ... 📌and now again in Q1 2026 ($100+ oil causing inflation concerns). When inflation is a primary concern, central banks are reluctant to cut interest rates, because adding more liquidity could make the problem worse. So while stocks and economic data are arguing for cuts, inflation is arguing to keep rates unchanged (or even an interest rate hike). The result? We don't see bonds rally when stocks fall. ❓So which investments perform well in this environment? Uncorrelated hard assets - like infrastructure, shipping and real estate. They often have 1️⃣ built-in hedges against inflation risk 2️⃣ they pay a regular return in up and down markets 3️⃣ they are inherently uncorrelated to short-term economic factors. That's why they are among the few asset classes in the GREEN at this point in the year. Are bonds still valuable in portfolios? Of course! If high oil prices start to impact economic growth, then we're looking at recession risks. In this scenario, the Fed and central banks will look to aggressively cut rates, causing bonds to rally. We can't discount this scenario. But we're not there yet. Our outlook is still for economic growth and the bigger concern right now is inflation rather than recession. That's why the combination of hard assets AND bonds are necessary to protect against inflation as well as growth risks. 📊 This chart is on p.64 of our Guide to the Markets and p.6 of our Guide to Alternatives, available at jpmorgan.com/GTA.

Your investment strategy at 30 should not be the same as at 60. Last week, I met a couple in their late 50s. They’ve worked hard for decades, raised children, paid off most of their home loan, and now… retirement is on the horizon. But here’s the thing, their investment portfolio still looked like it belonged to a 30 year old. High risk, heavy in volatile assets, minimal focus on income stability. When you’re young, you have time on your side. You can take bigger risks because you have years (or decades) to recover from market downturns. But as you approach retirement, the game changes: 📌 You’ll soon need to use your investments, not just grow them. 📌 You have less time to bounce back from market drops. 📌 Stability starts to matter more than aggressive returns. It’s not about “playing it too safe”  it’s about rebalancing your portfolio so it matches the new chapter of life you’re entering. Think of it like sailing:- In your 20s–40s, you can handle stronger winds. You’re exploring, you’re pushing ahead. By your 50s–60s, you’re guiding the boat steadily toward shore. You don’t want storms to throw you off course now. If you’re 5–10 years from retirement, ask yourself: 🔹 Do I have enough income producing assets? 🔹 Am I protecting my capital from big market swings? 🔹 Will my portfolio support me through retirement, not just to retirement? Because the goal isn’t just to get there. It’s to stay there comfortably without sleepless nights worrying about the next market crash. ♻️ Share this with someone who’s ready to get serious about their money ➕ Follow Vivian for more personal finance reflections (the honest kind)