One Cause of Volatility

Feb 2020

Contrary to somewhat popular belief, there is no such thing as “low volatility” stocks. The primary reason is that low volatility in stock price is not an inherent attribute of any given company. Let’s think about utility stocks, for example. Sure, their operational results are apt to be less volatile than for an automobile manufacturer. Moreover, if utility stocks always traded at roughly the same P/E ratio, it does make sense that utility stock prices would likely be less volatile than auto manufacturers. However, if utility stock prices climb sufficiently far above normal, a new component of volatility enters the picture—valuation. Simply put, high valuation (high P/E) stocks tend to be high volatility ones. Thus, as P/Es go higher, so does volatility—apart from the inherent low volatility of the utility business.