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Volatility is your friend: Colas


In 1968, Andy Warhol debuted the concept that “everyone would be world famous for 15 minutes.” Today thanks to an explosion of news coverage, the birth of the internet, and the dawning of social media, Warhol’s “cult of celebrity” prediction seems increasingly validated.

It’s also why ConvergEx Group strategist Nick Colas finds himself quoting a dead artist in reference to a changing market environment.

“The Fed has now been famous in capital markets for the six years,” Colas says in the attached video. “But now that the Fed is stepping away from QE and the longer end of the yield curve, and we see correlations (starting to) drop, their 15 minutes of fame are basically over.”

As Colas explains, for the past six years, correlations have been unusually high and therefore diversification has been unusually hard. While he says this phase has seen most assets going up, “the bad news is, when they have a bad day, they all have a bad day.”

The need to reduce risk is precisely why investors diversify their holdings and, as Colas says, pick assets that aren't correlated or “move separately and differently over the course of a cycle.”

He points out that this normalization is starting to take hold this year, and can be seen in the skewed performance of various sectors within an otherwise flat market.

“The big takeaway is that the market is getting healthier, correlations are going down, markets are behaving a little better,” he says. “It’s a more normal market, with a little more volatility, but much healthier.”