📈  Chart of the Week 12/14/2025

By Michael Allison, CFA

Source: Tier1 Alpha

A Few Thoughts on Volatility: Part 2

Last week, we focused the Chart of the Week discussion on volatility regimes and the potential benefit of paying attention to trends in volatility rather than on the level of volatility.

Volatility Regimes

With this week’s Chart, we also look at trends in volatility, only this time through the lens of a “risk on / risk off” investing environment. A “risk on” market environment is when volatility is trending lower. A “risk off” environment is when volatility is trending higher. A neutral environment is when volatility is not trending or is range bound.

Below is another version of the Chart with the S&P 500 overlayed on the original:

Source: Tier1 Alpha and YCharts

In this version of the Chart, what we see is intuitively obvious. When the environment is “risk on” (green), the equity market performs well, and vice versa when we’re in a “risk off” period (red).

I realize this isn’t particularly interesting or insightful. However, what I do find interesting in the Chart is how the depth and duration of “risk off” periods appears to affect the length and strength of a subsequent recovery.

This was particularly noteworthy during the 2020 and 2025 drawdowns, both of which were severe but fairly short lived. The period following the 2020 drawdown showed an extended up move in the S&P 500. In the aftermath of the 2025 pullback, the same could very well happen as we move into 2026.

Looking Ahead

As we near the end of 2025, we seem to be experiencing more of a Santa Claus Rotation, rather than the typical Santa Claus Rally we often see in December.

I view this as a healthy development whereby equity returns are broadening out. Laggards in more cyclical, value-oriented, and mid to small caps are experiencing a much anticipated catch up period of performance, while the previous leaders - the Mega Tech AI stocks are giving back some of their prior strength.

It’s entirely possible that this dynamic can continue in 2026, with the market growing (at least for now) more skeptical of the profit profile of the AI big spenders, and especially if interest rates continue to come down.

Interested in reading more of Mike's weekly newsletters? Click below to view The Sunday Drive.

The Sunday Drive