Doom and gloom are everywhere—everywhere, that is, except the stock market. Don’t expect the repose to last.
Since March’s bout of regional bank-inspired volatility, stocks have been stuck in a tight range, daily trading volumes have tumbled, and the
Cboe Volatility Index,
or VIX, has slumped. Even renewed concerns about the stability of the banking system following
First Republic Bank’s
(ticker: FRC) earnings didn’t have much of a lasting impact. The VIX spiked 11% on Tuesday, taking Wall Street’s so-called fear gauge to around 18.5 points, up from around 16 last week, but still low by historical standards. It came just a day after the New York Stock Exchange saw its lowest full-day trading volume of 2023 on Monday, when the
closed practically flat.
The low VIX, which uses options pricing to measure implied volatility going forward, is a reflection of the relative calm of the overall market. Trailing one-month S&P 500 realized volatility is just 9%, its lowest since 2021, and the S&P 500 itself has had only two daily moves of more than 0.6% in either direction in the month of April, including Tuesday’s 1.6% drop.
“Such low realized volatility is reminiscent of an era in which inflation was an afterthought and trust in the Fed put reigned supreme, and another sign that equities are ignoring risks [bond] markets are still warning of,” write BofA equity derivatives strategists.
But there are signs that the calm could soon break. Contrary to the VIX, the ICE BofAML MOVE Index—which measures bond volatility—remains near its record high, a sign that bond investors appear to be more concerned about the risk of a recession.
And while the market is calm, the VIX itself is getting more volatile (yes, there’s an index for that). The
VIX Volatility Index, or VVIX, touched 100 on Tuesday, up 25% in a week. Historically, when the VIX is at multiweek lows and the VVIX is at multiweek highs at the same time, the S&P 500 has had negative short-term returns, according to data from Jason Goepfert, chief research officer at SentimenTrader. And the VIX itself tended to spike: “Over the next couple of weeks, the VIX rose after 10 out of 11 signals, and the lone loss was reversed in the weeks ahead,” he writes.
A rising VIX could force so-called systematic funds, which buy and sell stocks based on whether volatility is rising or falling, to dump shares. Such funds have boosted their holdings significantly over the past few weeks as the VIX has declined, per Deutsche Bank strategist Parag Thatte, while other investors appear to have remained relatively on the sidelines. That dynamic has kept the S&P 500 in a tight trading range, with support from below thanks to underweight positioning and systematic buying, and a lid above due to ongoing uncertainty about the medium-term outlook. If the VIX starts to rise, systematic funds could be forced to sell stock, adding to the volatility.
Investors looking to avoid some seasickness could turn to stocks whose trading is historically much calmer than the overall market. They tend to be sellers of consumer staples or other goods whose fundamentals are least affected by whatever may be causing the volatility, but also include healthcare companies and purveyors of essential services.
The S&P 500 stocks with the lowest realized volatility over the past year include
Johnson & Johnson
Procter & Gamble
(WM), according to data from S&P Global. There’s also an exchange-traded fund that owns the 100 least volatile stocks in the index:
Invesco S&P 500 Low Volatility
Rather than trying to avoid the potential volatility, investors could embrace it by buying companies that directly benefit from it. Higher trading volumes that usually occur when markets start to swing more wildly could boost revenue at
Cboe Global Markets
Love volatility or hate it—just don’t be surprised when it returns.
Write to Nicholas Jasinski at [email protected]
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