Thoughts on Information, Volatility and a Lesson From Texas Hold ‘Em

We live in an era of nearly unlimited information access. But, I am also fascinated by the dichotomy between the massive trove of available information and, yet, the occasions when a marginal piece of information results in significant spikes in market volatility and changes in asset prices. After all, in an era of big data and machine learning, one might think the impact of a single piece of information would be marginalized. I would argue otherwise, and I believe global markets show us this time and again.

Market volatility in the face of additional information reminds me of the advent of the table camera in Texas Hold ‘Em poker games on television. Before these camera angles revealed each player’s hand, it was somewhat interesting to watch player strategy in a game of raw odds and emotions. But after this innovation, the game became far more captivating because it showed how people respond to additional information—where the “flop” and the “river” cards might be equated to a company earnings report or central bank decision for investors.

In investing, information and volatility tell you a great deal about how other investors are positioned, their central expectations, and the outcomes they anticipate. After all, higher volatility (in terms of the VIX index) in essence reflects a broader range of potential outcomes and higher options prices.

2018 provided several of these “information jolts,” and I thrive on these days. I always talk with our team about their perspectives in real time and it’s one of the advantages of working together in one office across our set of investment strategies.

The first such jolt arrived in early February 2018, in response to routine U.S. data showing higher average hourly earnings than forecast. The force and depth of selling in risk assets told me that investors were very nervous about inflation and the Fed policy path, with important implications across a range of investments.

Markets faced another volatility spike in early October when Fed Chairman Jerome Powell said—somewhat off the cuff during a conference—that we are a “long way from neutral.” Stocks dropped across all regions and volatility spiked about 30% in a couple days, as markets re-priced the “range of outcomes.”

For our team, this occasion gave us another critical look at investor positioning and behavior. Investors weren’t sure of the Fed’s stance, and most would stay away from emerging markets and hunker down in defensives. But the patterns in equities, currencies, and inflation expectations over the next several weeks were enormously insightful and, to us, spelled opportunity.

In summary, data and information are ubiquitous today and should be commoditized. But, the reality is quite different. The discovery of marginal information over several trading days can determine an entire year of asset returns. At Calamos, we believe investing is a mix of art and science—and we wouldn’t want it any other way.

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Todd Speed

Todd Speed
Senior Vice President, Portfolio Specialist