It seems just recently that investors were worried about an unavoidable recession. Many pundits were citing reasons why an economic collapse was inevitable, and when the yield curves inverted, it seemed like these bearish voices were correct.
However, market sentiments have undergone a complete reversal over the past couple of weeks as major indexes hit record highs today. While investors cheered as U.S. exchanges soared, the CBOE Volatility Index (VIX), which represents options activity of the S&P 500, is at near historic lows, showing a level of calmness in the markets not seen in a long time.
The VIX, also known as the “fear gauge” by investors for its ability to evaluate how worried investors are, was at a 12 on Tuesday and has fallen 9.4 percent in this month. In comparison, the VIX had spiked to above 36 on Christmas Eve last year.
According to research done by Nicholas Colas, co-founder of DataTrek Research, emerging market stocks alongside bonds, gold, and long-dated treasuries had implied volatility levels close to one-year lows, alongside large-cap U.S. stocks.
“Sentiment is incredibly bullish,” said Nancy Davis, chief investment officer at Quadratic Capital Management. “So many people are chasing performance now.” She added that investors have largely been selling options on equities and other assets, income-boosting strategies that work well when market volatility remains low for long periods of time.
U.S. stock indexes have rallied in 2019, reaching record highs as Federal Reserve Chairman Jerome Powell said that the central bank would wait on further interest-rate increases. Investors have also turned away from bearish sentiments that had grown a few weeks prior, thanks partially to fresh data which showed a rebound in retail spending and strong metrics in the country’s labor market.
Employment figures have always been used as a strong indicator for future economic trends, with a potential downturn seeming unlikely as figures remain strong going forward.
“We have seen these periods before where the coast is sufficiently clear and market psychology stabilizes,” added Macro Risk Advisors’ CEO Dean Curnutt. The executive noted that market volatility has seen one of the biggest falls in history earlier in 2019, with hedge funds consistently increasing bearish bets against the VIX. The index fell from it’s high of 36 on December 24 down to 17.8 on January 18, a 50 percent decline and one of the fastest drops in the VIX’s history.
However, other experts went on to say that this period of low volatility were unsustainable and shouldn’t be expected to last long, despite historic data that shows the VIX hovering in the teens for months at a time.
Mike McGlone, a senior commodity strategist at Bloomberg Intelligence, went on to say that he doesn’t expect low volatility to last long. As an expert in the gold market, McGlone recognizes that volatility and prices for the precious metal are inversely linked, and that “increasing U.S. stock-market volatility was the primary gold bull driver in 4Q as the dollar rallied. A buried VIX indicates elevated mean reversion risks. Conditions for the depressed VIX don’t get much worse.”
Time will tell how long these highs last, but investors should definitely enjoy them while they can.
