Volatility is Changing The Tenets Of Conventional Investing

Oscar Garner III

11.10.2020

The US stock market’s volatility (get ready to read that word a lot) has created dramatic highs and lows for investors. The days of steady prices and predictable trends have long passed, and traders are scrambling to get a handle on this new normal. “The VIX index, an instrument used to measure volatility in the US equities market, has traded above the 30% mark in more weeks this year than it had done in the prior 10 years”. This means even our measures for volatility are… volatile. With increased market uncertainty and volatile prices becoming more common, several tenets of investing could reverse.

Higher Taxes

Usually, market participants would want to avoid higher taxes. Whether it be corporate or personal income, taxes have been seen as an, “impediment to corporate earning and economic growth" and a hinderance to economic demand. This paradigm of course has shifted. The coronavirus pandemic has created immense federal debt that must be funded in order for the US to recover. Investors will now hope for increased taxes to fund stimulus projects towards economic recovery. Even large corporations understand that sacrifices must be made for the betterment of the market and their industry.


Political Gridlock

Under usual circumstances, political gridlock has worked in the favor of market activities. A lack of cooperation between rival political parties means major changes are rarely introduced into the market. Increased corporate tax rates and more regulations, a negative for investors, have been held off political gridlock. Now the situation has changed. Market participates are now willing to embrace cooperation and reform in the name of ‘economic relief’. The recent deadlock on a stimulus deal caused a major drop in stock prices that investors would prefer to avoid. Going forward, look to see Wall Street lobbying for compromise and cooperation.

Source:
Three tenets of conventional investing that might reverse as volatility becomes 'the new normal, by Theo Golden, Business Insider, Nov. 5, 2020.