Pro Analysis

Trade like it's 1999? Strategist sees return to volatile environment of rising stocks, big shocks

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

The end of the Federal Reserve's grip on markets, a maturing economic expansion and the coming policies (and tweeting) of President Donald Trump will send us back into a highly volatile trading environment like the late 1990s, according to Jim Strugger, derivatives strategist at MKM Partners.

"Late-cycle dynamics suggest a healthy environment for U.S. equities and risk assets broadly, but an inflection in monetary policy could remove a significant force that has acted to suppress equity volatility and bring it in line with more elevated cross-asset volatility," wrote Strugger in a note to clients Friday.

"This would result in the baseline for VIX shifting moderately higher and an increased frequency of higher-magnitude shocks more akin to August 2015 and January 2016 than the presidential election-related event."

"The late 1990s are our favorite analog, during which time elevated equity volatility coexisted with upward-trending equity markets," Strugger added.

The graphic below illustrates the environment the analyst is describing. It's the CBOE Volaility Index (orange) versus the S&P 500 during the 1990s and early 2000s.