Gyrostat Risk Managed Market Outlook: Uncertainty And Anticipated Volatility

There remains considerable uncertainty about the market outlook, with a wide range of possible outcomes. Recent minutes from both the US Federal Reserve and the Reserve Bank of Australia illustrate this uncertainty.

The Federal Reserve Chairman Jerome Powell is concerned about risks lying ahead:

"Uncertainty around the economic outlook has increased ... We think that right now, the appropriate thing to do is to wait and see how things evolve. There's so much uncertainty,"

(Source: FXStreet, 28 May 2025)

At its May press conference post-meeting, Australian Reserve Bank Governor Michele Bullock stated:

"While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries. Geopolitical uncertainties also remain pronounced."

"These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook.

World trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty."

(Source: ABC News, 20 May 2025)

Despite these statements, the market pricing of risk has stabilised at levels prior to the USA's 'Liberation Day' tariff announcements.  In interpreting the VIX number, a VIX of [19] means that the market is pricing a one standard deviation [68%] probability of the index in 12 months' time being in the range of 4772 to 7007 with the SP500 at the 5889 level.  In contrast, when the VIX of [30] implies a 4123 to 7655.  The higher the uncertainty, the more expensive it is to buy protection (a put option).

The Gyrostat approach responds to market conditions.  With the recent falls and stabilisation in the price of risk, the duration of protection has been extended.  With lower costs, there has been a reduced need to sell call options for premium ("covered calls"), as the premiums received are significantly lower than those available in a higher volatility environment.

Source: Google Finance -INDEXCBOE: VIX

In buying protection, there is a window of opportunity that offers investors the opportunity to protect their portfolios against major market falls

Actual/realised volatility has been quite low by historic standards, despite the outlook

There is a natural movement in stock prices because of changes in investor sentiment towards a particular stock.  Academics refer to this as "Brownian motion". At Gyrostat, we capture stock-specific data on the number of times the stock moves within a +-2% range, and the number of times the stock 'gaps' on the open.  With a protection always in place strategy, the more movements in the underlying asset-volatility, the greater the profit potential, with the protection level then adjusted to 'lock in profits' and close any risk within the pre-defined risk parameter.

During 2025, by historical standards, there has not been significantly more volatility than in prior years.

At the index level, as at the end of April, there have been [19] upwards and [16] downward re-sets, similar to the past 5 years.  The most recent spike occurred during the COVID-19 pandemic.

Source: Gyrostat analysis of published ASX data

This can also be tracked at a stock specific level.

For instance, National Australia Bank during 2025 has experienced similar stock price conditions since FY21, with YTD [37] upward movements and [29] downside, with gaps of open upside [9] and downside [12] exceeding 2%.  These gaps provide the potential for larger gains on the stock market open.

Source: Gyrostat analysis of published ASX data

The realised volatility in BHP has in fact reduced during the FY25 year, with [24] upside and [25] downside movements of 2%, and gaps on open of [14] up and [20] down exceeding 2%.

Source: Gyrostat analysis of published ASX data

Outlook:

Our view remains that there is likely to be an increase in the realised volatility, which can be measured by the underlying movements of the stock price. The risks remain elevated of larger downside 'gaps' and price movements, known as sequencing risk. The current market opportunities provide lower-risk investors with the opportunity to construct a portfolio that is not reliant on predicting market outcomes and covers a broad range of market scenarios, including large market declines.

This article has been prepared without taking account of the reader's investment objectives, financial situation or needs and is intended solely for Australian residents. Any person reading this document should, before deciding to invest in or continue to hold investments, seek professional advice.