The market is going to get wild this year and millennial investors aren’t ready, Merrill Lynch says

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Jose Luis Pelaez | Getty Images

Millennials haven’t seen many wild stock-market swings in their lifetime. But they may get their first real dose of volatility this year.

Average volatility is measured by the the Cboe volatility index, or VIX, also known as Wall Street’s “fear index.” The higher the number, the more swings in the markets there are. The average level of the VIX since this age group began working is 17, which is 25 percent lower than the prior two decades’ average of 22, Subramanian said. The VIX was at the 17.17 level on Thursday.

Changes in the volatility landscape would likely challenge some biases about sectors. High-flying growth tech stocks, for example, were an investor favorite throughout the historic bull run following the financial crisis.

“The prototypical professional investor is likely focused on growth and momentum, thinks Financials are uninvestible, is unused to volatility, and sees valuation as largely irrelevant,” Subramanian said. “But momentum is now expensive, crowded and at risk, Financials are transformed and valuation always matters, eventually.”

With that in mind, Subramanian said the firm favors “high quality companies” and still sees upside to the S&P 500. She pointed to 1995 to 1998 the VIX doubled, and the S&P 500 returned 80 percent. The firm’s year-end forecast for the S&P is 2900 with expected 5 percent EPS growth.

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