As for the pain that has plagued the US stock market, one thing has been in surprisingly short supply: fear.
almost every corner of wall Street Troubled by worries that rising interest rates will propel the economy into recession, everything from junk bonds to foreign currencies will cause huge price fluctuations. But the CBOE Volatility Index, the so-called fear gauge of stock-investor sentiment, is well below levels seen in previous bear markets.
Options strategists and bankers cite one simple reason: The S&P 500 is staging a long, orderly descent from its hit of record lows at the start of the year as the Federal Reserve pulled back a flood of pandemic-era stimulus. This is in contrast to shock-driven crashes such as Covid-19 in March 2020 or the collapse of Lehman Brothers Holdings Inc. in September 2008, both of which jumped the VIX as investors sought to hedge the risk of wild market swings.
“Negative sentiment dominates the conversation as bull market excesses are brushed off,” Lewis Grant, a senior portfolio manager at Federated Hermes, wrote in a note. “Yet the VIX index is only marginally higher. At least for equities, it’s a systematic bear market rather than outright panic.”
In fact, this year the VIX has not breached the key 40 level, which many experts see as an extreme fear signal. It doubled from that level at the start of the pandemic and during the 2008 credit crisis.
The current market more closely resembles the market after the dot-com collapse, another period when stock valuations are considered by many to be volatile highs. According to Talal Dehbi, Senior Sales and Quantitative Strategist at PrismFP, the VIX currently implies a 2% daily move in the S&P 500.
“The current behavior is playing out similar to the 2000-2002 dot-com bear market, with no major sudden jerks but continued high realized volatility,” he said.
As a result, traders are not flocking to volatility hedges. Take the slant, which measures the relative cost of hedging against a standard-divergence decline in the S&P 500. Its cost is hovering around June 2019 levels.
Sidelined concerns about volatility may also reflect another element of the stock market’s slide. As deep as it has been, with the S&P 500 down 18% this year, the reasons are well known: tighter monetary policy and rising inflation. The main question is when both of them have left enough to allow the market to reverse.
On Friday, the S&P 500 rose more than 3%, its biggest gain since May 2020, after a reading on inflation expectations and a Fed official suggested recession fears were over.
“Sufficient investors are panicking and buying short-term protection puts, which will push the VIX index too high,” said Edmund Shing, chief investment officer at BNP Paribas Wealth Management.
There are some signs of that change. The VVIX index – which measures the implied volatility in options on the Volatility Index – has been hovering below 100 and recently hit its lowest level since January 2020. This means traders expect smooth sailing ahead for the VIX index.
This makes equity relatively unique. The ICE BofA MOVE Index, a gauge of expected volatility in the Treasury market, is hovering near the high hit at the peak of its March 2020 selloff. The same is true of the JPMorgan Global FX Volatility Index.
“Inflation, Fed policy and interest rates are central to market risks. Thus, the MOVE is exceptionally high,” said Dean Kernutt of Macro Risk Advisors, citing differences in bond and stock volatility.
BNP’s Shing said he was surprised the VIX had not risen with measures of corporate risk, such as the cost of credit default swaps to protect against a default, which have risen sharply this year.
In recent bear markets, the VIX has typically risen to 45 before the S&P 500 bottoms out. That’s roughly where its crest was in 2002, marking the bottom of the dot-com bust. On Friday, it ended the day down around 27.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.