Why the Volatility Cycle Isn’t Over Yet

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It wasn’t just the short option that killed the LJM fund in 2018, it was complacency. LJM advertised the fund as a low-risk/high-return fund and named it the “Preservation and Growth” fund. The fund had posted positive returns every year except one since its launch in 2006. However, the fund was heavily loaded with short puts and calls, which led to an 82% loss during the volatility spike.

On February 5, 2018, the Bureau of Labor Statistics reported 200,000 new jobs added in January, exceeding expectations. Average hourly wages also rose, marking a 2.9% annual increase, the largest since 2008-2009. This data spooked the bond market, causing yields to spike. Ten-year Treasury yields hit their highest level in four years. The resulting volatility rocked the S&P 500, contributing to one of the most significant market selloffs in recent history, and the "PitBull" lost $25 million that week.

Yesterday, bonds closed below 112, and Nvidia (NVDA) hit a new high on the open near 153 and then fell 6.3% to close on the lows. The market action brought back memories of the swirling volatility from mid-January to the end of February 2018. Maybe there will be a Trump sugar high after he takes office but the Democrats will be blocking his agenda as well as some in his own party. The current environment suggests that the "volatility party" is far from over. In fact, the conditions for increased volatility appear to be strengthening, with inflation, yields, and political tensions serving as catalysts.