Wall Street’s ‘Fear Gauge’ At 3-Year Lows As S&P 500 Nears Bull Market
Published 6:21 am Wednesday, June 7, 2023
- Wall Street's 'Fear Gauge' At 3-Year Lows As S&P 500 Nears Bull Market
The stock market’s key volatility index, often called Wall Street‘s Fear Gauge, has slumped to its lowest levels in three years this week, as the S&P 500 looks set to break into bull market territory amid easing recession concerns and fading Federal Reserve rate hike prospects.
The CBOE Group’s Volatility Index, the VIX, attempts to capture the expected 30-day volatility of the S&P 500 benchmark.
The gauge fell 4.68% in the overnight session to 14.04 points — after falling below the 14 point level for the first time since February of 2020 — in a move that extends its year-to-date decline to around 33%.
At current levels, the VIX suggests traders are anticipating daily moves for the S&P 500 of around 37 points, or 0.87%, over the next month. That compares to 30-day volatility levels of around 1.6% at the start of the regional banking crisis in early March.
Goldman Sachs, which lowered its recession odds to 25% earlier this week thanks in part to a successful debt ceiling deal, has argued that strong labor markets are a “key determinant of equity market volatility”.
The U.S. economy added 339,000 new jobs last month, data from the Labor Department indicated last week, while wage growth slowed to 0.3% when compared to April levels, boosting the chances of a so-called ‘soft landing‘ for the domestic economy.
In a recent research note, Christian Mueller-Glissmann, head of asset allocation research within portfolio strategy at Goldman, notes that lower VIX levels could suggest investors are reading to move some of their excess cash into the equity markets now that recession risks have faded and the Fed looks near or at the end of its rate hike cycle.
Recent data from Bank of America’s closely-tracked Fund Managers’ Survey suggests that cash levels remain elevated, at around 5.6% of total portfolios. That’s down from the two-decade high 6.1% levels seen in September of last year but well above the accepted “neutral’ rate of around 4%.
That suggests that even a modest move from the sidelines could ramp global stocks firmly higher over the coming months. The BofA survey also noted that investors are not only betting on a ‘soft landing’ for the U.S. economy, but fully 61% think the Fed has executed its last rate hike.
The S&P 500 is up 11.57% for the year, having risen around 4.25% since the start of the second quarter alone, as is just 10 points shy of a 20% gain from its October lows, a move that would lift the benchmark into bull market territory.
Others are finding the recent rally difficult to justify.
“Under the surface, the equity market looks less healthy than the major indexes suggest,” said John Lynch, chief investment officer for Comerica Wealth Management.
“After gaining clarity on the debt ceiling, we look for the Federal Reserve to remain steadfast in its policy pursuits, with elevated interest rates and tighter credit standards weighing on economic activity for the remainder of the year.” he added. “Falling corporate profits historically have led to reductions in employment and capital expenditures, and we see no reason why this experience should prove any different.”
Collective S&P 500 profits are likely to have fallen 0.01% from last year, to a share-weighted $441 billion, with second quarter profits forecast to fall 5.4% from last year, but come in flat compared to the first three months of the year.
Low VIX volatility levels could reflect that anticipated move, in fact, given the arithmetic of its calculation.
If stocks were to rise 1% each day for ten days, for example, the implied volatility would be zero, given that the rate of change each day is the same.
Options traders, who keenly track the cost of hedging their positions, may also find that executing downside protection trades aren’t worth pay for, at least in high-volume, muting the overall VIX levels.
That means that while low volatility levels are sometimes misinterpreted as a sign of complacency, they can also indicate near-term bullishness.
Louis Navellier, chief investment officer at Navellier Calculated Investing in Reno, Nevada, however, thinks the muted VIX levels may suggest both an an expensive market and richer alternatives elsewhere.
“The low VIX reflects the lack of major concerns, which also means there’s a lack of underpriced opportunities,’ he said. “Investors who have sat on the sidelines waiting for the much anticipated recession to buy the dip appear reluctant to give up 5% money market yields and jump in after missing such strong year-to-date returns in hopes for further material gains.”
