Hold Tight for Higher Volatility

NEW YORK (TheStreet) -- Hold tight for higher volatility ahead. That's the message from market pundits, who warned that several factors will lead to greater equity volatility in 2014.

These factors include uncertainty on stimulus withdrawal from the Federal Reserve, a rocky transition for emerging markets as global rates rise, lower expectations for earnings growth, and concern around slower growth for China.

But greater volatility also has clear upside. For traders, it means more opportunity for profit in a shorter period. Stocks are differentiated to a larger extent on their individual merits, which means a richer payoff for doing your homework vs.macroeconomic moves causing big lurches in sentiment. Investors sophisticated enough to short sell also prefer such a backdrop, as it enables them to profit on falls in price.

Yet the rise in volatility isn't expected to be drastic, said Russ Koesterich, BlackRock's global chief investment strategist.

"We are not forecasting unusually high levels of volatility, rather, we anticipate volatility will continue to rise from what have been unusually low levels," he told clients. Koesterich said he expects the CBOE VIX (the core measure of equity volatility) to rise from its current levels of under 15 toward its long-term average of around 20.

As if to reinforce that volatility won't be disruptive, deal activity has jumped this year. M&A only picks up after sufficiently long periods of low volatility, with deal volumes being lackluster ever since the credit crisis.

Interactive Brokers chief market analyst, Andrew Wilkinson, also noted that variations in the VIX are a gauge of investor sentiment. For example, even as stocks try to break new highs, the VIX is above its levels when stocks peaked in January and the week after Thanksgiving. This indicates caution on the outlook, even as bulls continue to dictate sentiment across U.S. equity markets.

-- Written by Jane Searle in New York

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