Global markets have seen a rise in volatility over recent months and the UK’s vote to quit the European Union – as well as the looming US presidential election and slowing growth in China – sets the stage for more turbulence to come. 
As many a watcher of financial markets will know, veteran investor John Templeton famously said: “The four most dangerous words in investing are: ‘this time it’s different’.”
With this in mind, Bank of America Merrill Lynch (BofA ML) publishes an annual report – ‘The Longest Pictures’ – which looks at a range of investment issues over multi-decade and multi-century time frames.
In this gallery, we pull out some of the more risk/reward charts from the report – including around 100 years of gold prices and data showing how volatility spikes seems to be getting more common.
The gold price since 1920
Source: BofA Merrill Lynch Global Investment Strategy, Bloomberg, World Gold Council
The price of gold was fixed at $20 per troy ounce under the Gold Standard Act until 1933, then Roosevelt revalued it at $35 in the midst of the Great Depression under the Gold Reserve Act of 1933. The Bretton Woods Agreement set a system of fixed exchange rates for major currencies in gold terms in 1994 but the US abandoned this in 1971.
Gold moved from $100 to more than $660 between 1976 and 1980 because of stagflation, with the yellow metal’s bull market brought to an end by anti-inflationary monetary policy in the 1980s. However, gold is now much higher than it was then.
“Intense deleveraging and zero interest rate policies across the G7 fuelled another bull market in gold, pushing prices from $600 per ounce to a peak of $1,900 per ounce in September 2011,” BofA ML said. “Recent declines in tail-risk fears and the prospect of the end of QE in the US caused gold to plunge to a six-year low of $1,051 per ounce by the end of 2015.”
A history of volatility
Source: BofA ML Merrill Lynch US Equity & Quant Strategy, Bloomberg
The VIX index – which is often known as Wall Street’s ‘fear gauge’ – currently stands at 15.71, which is below its long-term average of 19.74.
The most volatile month in equity history was October 1987 (which saw ‘Black Monday’, when the Dow Jones dropped 23 per cent in a single day), BofA ML points out. In that month, volatility reached 91 per cent.
“A two standard deviation event would be associated with volatility in excess of 36 per cent. On average, such an event has occurred once every 25 months in the past 90 years,” the bank’s analysts said.
“Note that monthly volatility exceeded 50 per cent on 15 different occasions during the 1930s. Since the 1930s, there have only been five >50 per cent occasions: September 1946, October 1987 and September, October and November 2008.”
Volatility spikes
Source: BofA ML Merrill Lynch US Equity & Quant Strategy, Bloomberg
The above graph illustrates the historical volatility of various assets, showing the five dates when they experienced their biggest one-day jumps from their 100-day trading ranges. BofA ML highlights how many of these have occurred in recent years.
“Despite volatility across asset classes still being below historical levels, we are witnessing the largest number of violent dislocation sin asset prices since 2008. This is due to record low trading liquidity, heavy investor crowding and the manipulation of risk by central banks,” the analysts said.
“Hedge funds have recorded their poorest performance relative to the risks they take since 2008, despite underlying volatility being only 25 per cent as high.”
US government bond rolling returns
Source: BofA Merrill Lynch Global Investment Strategy, Ibbotson, Bloomberg, Datastream
Here we see the rolling 10-year annualised total return of long-term government bonds (those with maturities longer than 15 years). This currently stands at 8.1 per cent and US government bonds have outperformed US stocks thanks to their safe haven characteristics.
However, BofA ML said: “Fixed income returns are on a secular downtrend as a 35-year bond bull market culminates with a historically low level of interest rates.”
“Fixed income returns have nonetheless remained highly competitive in recent years thanks to zero interest rate policies/negative interest rate policies and deflation.”
The worst returns from commodities since 1933
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data
Commodity prices soared in the post-World War Two era but reached their peak in the 1980s after reaching a 90-year high when they recovered from the two oil shocks of the 1970s.
Commodities also did well in the opening decade of the new millennium, but have come under pressure more recently due to increased supply and slowing demand from China.
“The collapse in the rolling return from commodities to the lowest level since 1939 is indicative of an asset class that has been a ‘deflation loser’,” the bank said.
“Commodities, banks, value stock, TIPS, cash… are today’s humiliated asset classes, the new secular contrarian ‘longs’. But the secular case for these ‘deflation losers’ requires a catalyst; it was QE for stocks in 2009.”