In a world that feels increasingly chaotic, the stock market has oddly become a source of calm. Investors should enjoy it while it lasts.
You’d be excused for not paying attention to the market this past week. It was the fallow period between earnings seasons, and economic data was, for the most part, lacking—the highlight of the week, the personal consumption expenditures price index, was released when the market was closed on Good Friday. Even the tragic collapse of Baltimore’s Francis Scott Key Bridge had a limited impact beyond a few individual companies. The
rose 0.4%, while the
or VIX, closed at an ultralow 13.01.
The market’s recent calm has the bears’ hackles raised. They look at the VIX and see a market happily ignoring the all-too-obvious dangers—or worse. The idea that volatility has been held down artificially by the actions of funds selling “vol” has become “pervasive,” according to BofA Securities strategist Lars Naeckter, but it also appears to be wrong. Naeckter and his team studied options trading to gauge how much impact it is having on market volatility and found that it wasn’t all that much, perhaps pushing the S&P 500’s realized volatility a point and a half lower than it would be otherwise.
“More simply, at a few points of vol compression the impact…on S&P volatility is certainly non-trivial but also is not the core reason the VIX is in the low teens,” Naeckter writes.
Other factors appear far more important. For starters, the “correlation,” or the tendency to move in the same direction, between single stocks has fallen to very low levels, a sign that idiosyncratic factors, not macro ones, are having the most direct impact on shares. That means the moves higher and lower can cancel each other out, resulting in a muted move at the index level. That can be seen in the performance of the Magnificent Seven—
and
were both off more than 4% this past week, while
Alphabet
,
and
finished higher—as well in the market’s overall breadth, where winning stocks in the NYSE Composite index outpaced losers by 2-to-1, with big gains in smaller companies helping to offset losses elsewhere.
The muted stock volatility can also be attributed to the Treasury market—it’s finally calming down. The ICE BofAML MOVE index, the bond market’s VIX, closed the week at 86.38, near its lowest level in more than two years, after spiking to nearly 200 in 2023. With the 10-year yield finally settling in near 4% and change, bonds are becoming a calming factor, like chamomile tea, for the stock market, rather than a source of stress.
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Nor does low volatility mean a period of market angst is just around the corner. Periods of calm, with short blips of angst, can last for years, as they did in the mid-1990s and in the years before the 2008-09 financial crisis. And with the economy and corporate earnings showing resilience amid higher rates, bond volatility normalizing, and correlations low, volatility could remain low for quite some time—and perhaps head even lower, “The big change happening currently is the normalization of bond market volatility,” writes Société Générale strategist Jitesh Kumar. “We see a few more quarters of low equity volatility before an eventual pick up in the volatility cycle due to natural causes.”
Enjoy the silence.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
