The anatomy of bull markets since 2009 differs greatly among regions. GS did a good job deciphering the drivers of rising equity markets in different countries, which show the contribution of both valuation (P/E i.e. investor psychology) and fundamentals (i.e. real corporate profits).
Volatility is the most disturbing factor in financial markets and it’s something people should always keep an eye on. Measured by popular metrics like VIX or VSTOXX, it’s assimilated to the « fear indicator » of investors.
Looking at the long past of the US equity market (S&P 500 in chart below), you can see that volatility goes in regimes that can change widely but rely mainly on macro environment (expansion/recession) and it’s impact on the psychology of investor (P/E or valuation).
Volatility in equity market in perspective
Short answer: lower returns.
This charts illustrates equity drawdowns over history in the US, Japan and Europe.
With interest rates being negative for most of the bonds traded and issued around the world, the opportunity cost of cash is very high. But it’s probably the most valuable yet contrarian asset to own to help diversify risk in a portfolio.