Here's why higher volatility is likely here to stay

A trader works on the floor of the New York Stock Exchange (NYSE) in New York.
Michael Nagle | Bloomberg | Getty Images

The CBOE Volatility Index (.VIX) just passed 20, its highest levels since June. What's it all mean?

The immediate source of the rise is concerns about the presidential election. You can see this clearly because the cash VIX, at roughly 20, is much higher than the VIX futures contracts: 19.10 for November, 18.50 for December and 19.35 for January 2017. When the cash contract is higher than near-term futures contract, it means investors are anticipating a near-term event that will move the markets, then subside.

That's clearly related to the election, no?

Yes, the moves in the last couple days are related to the election, but there's some longer-term trends happening as well.

First, volatility almost always rises this time of year, starting in September.

The other factor is the Fed, which is the only proven volatility mover this year. Not Brexit (that was a two-day volatility event), at least not yet.

The economic outlook, while still mixed, is broadly improving. GDP is higher in the second half than the first half. The job outlook is still strong. There's been low inflation, and bond yields have been depressed.

All of that has contributed to a strong outlook for equities. But that is now changing.

Monetary policy is changing. Yields are now steepening. Inflation readings are rising. In other words, several of the factors that supported higher stock prices are now no longer there.

That, logically, would mean volatility should rise.

It may also mean that P/E ratios will be under pressure.

Where will this end? Given the election and the Fed, it's remarkable the VIX has been so quiescent. We haven't moved much: The average level is still well within the normal range of roughly 15 to 20.

Surprised by this? You shouldn't be. This is the way human beings are. We aren't that good at planning. We don't tend to focus on something until it is staring us in the face.

The same thing happened with Brexit. Everyone knew Brexit was a potentially big market-moving event, but the VIX was below 15 for almost the entire event. It wasn't until about 10 days before, when polls started showing the race was tighter than expected, that the VIX started moving up.

While volatility is not welcomed by long-only investors (it usually means "down") I can tell you my trader friends are absolutely delighted. Volume has picked up this week, offering one of the few bright spots in an otherwise miserable year (again) for the trading community.

If you doubt how much trouble the trading community is in, take a look at stocks associated with trading activity, like Virtu (down 44 percent year to date), BGC Partners (down 14 percent), or KCG Holdings (down 20 percent in the last two weeks after earnings).