Sudden changes in volatility and monetary policy could spark an “interesting” period for stock markets in the next couple of years, the CEO of Barclays warned Thursday.
Speaking at the World Economic Forum in Davos, Jes Staley noted that financial conditions are somewhat reminiscent of the run-up to the global financial crash of 2008.
“Asset values such as the stock market are at all-time highs, every major industry around the world last year grew by more than 20 percent, volatility is at an historic low. And almost even more concerning than that — a lot of what’s driving that low in volatility is people are selling short volatility,” he said, implying that traders are betting that volatility could push even lower.
“So if you’ve got a lot of short positions at an all-time low level and something snaps, the velocity of recovery could be quite something to watch,” he said.
The most common measure used to assess volatility in the U.S. is the VIX index, which has been persistently at low levels for the past year. This means that investors are relatively calm about the economic backdrop. However, many wonder if this is the calm before the storm and a market correction is around the corner. Even more so when people are selling “a lot of” short volatility, which indicates they do expect nervousness to pick up in the future.