The Wall Street sign is drawn outside the New York Stock Exchange in New York. (Reuters / Carlo Allegri / File Photo)
There is one surprising supply shortage for all the pain accumulated in the US stock market. It’s horror. Almost every corner of Wall Street is rattling with concerns that rising interest rates are pushing the economy into recession and causing big price volatility in everything from junk bonds to foreign currencies. However, the CBOE Volatility Index, the so-called horror gauge of equity investor sentiment, is well below the levels seen in the bear market in the past.
Optional strategists and bankers give simple reasons. The S & P 500 has had a long and orderly decline from a record-level hit earlier this year as the Federal Reserve has regained a flood of stimulus in the pandemic era. This is different from shock crashes such as the March 2020 Covid-19 and the September 2008 collapse of Lehman Brothers Holdings.
“Negative emotions dominate the conversation once the bull market excess is resolved,” said Luis Grant, senior portfolio manager at Federaled Hermès. At least for stocks, this is not a complete panic, but an orderly bear market. “
In fact, this year’s VIX does not exceed the key level of 40, which many experts consider to be a peak horror signal. During the early days of the pandemic and the credit crisis of 2008, it jumped to twice that level.
The current market is very similar to the post-dotcom market. This is another time when stock valuations have fallen from what was considered an unsustainable high. According to Talal Dehbi, Senior Sales and Quantitative Strategist at PrismFP, VIX currently means a 2% daily move on the S & P 500.
“Current behavior is similar to that of the dot-com bear market from 2000 to 2002, with no major sudden shocks, but high realization volatility persists,” he said.
As a result, traders are not flocking to volatility hedging. Take a skew to measure the relative cost of hedging against one reduction in the standard deviation of the S & P 500. Its cost has remained around the June 2019 level.
Bystander concerns about volatility may also reflect another element of the stock market slides. This year’s S & P 500 fell 18%, the cause of which is well known. Monetary tightening and a surge in inflation. The main problem is when these two have enough room to turn the market around.
On Friday, the S & P 500 rose by more than 3%. This is the largest rise since May 2020, after readings about inflation expectations have eased and Fed officials have suggested that concerns about a recession are overkill.
Edmund Shing, Chief Investment Officer of BNP Paribas Wealth Management, said:
There are few signs of that change. The VVIX index, which measures the implied volatility of options in the volatility index, is below 100, the lowest since January 2020. In short, traders expect a smoother voyage of the VIX index.
It makes the stock relatively unique. The ICEBofAMOVE index, an indicator of expected volatility in the Treasury market, remains close to the highs hit at the peak of March 2020 sales. The same applies to the JP Morgan Global FX Volatility Index.
“Inflation, the Fed’s policies and interest rates are central to market risk, so MOVE is very high,” said Dean Curnutt of Macro Risk Advisors, citing the difference in volatility between bonds and equities.
BNP Shin said he was surprised that VIX wasn’t rising, along with measuring corporate risks such as the cost of credit default swaps to prevent defaults that surged this year.
In the bear market these days, VIX has usually risen to 45 before the S & P 500 bottoms out. It is where it culminated in 2002, marking the bottom of the dot-com bust. Friday ended around the 27th.
