Corporate Bonds Are Key to Understanding Volatility

When it comes to market volatility, don’t discount the influence of U.S. presidents. According to the Presidential Cycle Theory, the highest stock market returns are achieved in the third year of a new administration. Volatility, though, rises in the first year before peaking later on, as new policies work their way through markets. Since Donald Trump was elected in November, the theory has been proven wrong, as the market generated single-digit returns at record-low volatility relative to any president in history.

There are many theories to explain why volatility is so low. One is that Trump’s communication style creates chaos, muting investor flows. Another is that with health care and tax reform uncertain, the economy is in a slow bind and the Federal Reserve will be cautious in raising interest rates.