The Calm Before the Storm? US Stock Markets Hit Pre-Pandemic Levels of Volatility Despite Ongoing Concerns Over Inflation and Interest Rates
Over a year after the coronavirus pandemic took the world by storm and sent global economies and financial markets into a frenzy, the US stock market has finally regained its pre-pandemic volatility levels. Recent market data indicates that VIX, the CBOE Volatility Index, has fallen to 13.5, its lowest level since January 2020.
Despite concerns over soaring interest rates and inflation compounded by the uneven global economic recovery, investors seem undeterred. The S&P 500 has returned to bull market territory, boasting a 20% increase or more from its recent low in October 2020.
Experts have attributed this to a handful of tech-related stocks buoying the market. However, market analysts warn that this tranquillity may not last long, as investors often become complacent when volatility levels hit such lows, leading to spikes in the coming weeks.
This article will explore the current state of the US stock market, the factors attributed to its pre-pandemic volatility levels and what the future holds for investors and traders alike.
The VIX Index: A Quick Overview
The CBOE Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking-relevant volatility of the S&P 500 index options. In simpler terms, it estimates investors’ expectations of market volatility and economic instability over the next month.
Experts argue that the VIX has historically been a reliable indicator of future market trends. As such, its recent decline to its lowest level since the onset of the pandemic has garnered significant attention and scrutiny from market analysts and investors alike.
What’s Driving the Current Volatility Levels in the US Stock Markets?
Despite the ongoing concerns surrounding interest rates and inflation, palpable market optimism seems to have seeped into the US stock market. Key drivers of this trend include:
1. Bull Market Territory
The bull market has returned to the US stock market, with several tech-backed stocks delivering robust gains and growth over the past year. These gains have lifted the market out of its pandemic-induced slump, creating a sense of optimism among investors.
2. Low-Interest Rates
Interest rates have hit historic lows due to the COVID-19 pandemic. As a result, investors and traders are turning their attention to the stock market in search of returns.
3. Stimulus Measures
The US government’s stimulus package has injected much-needed funds into the economy, providing consumers and businesses with much-needed liquidity.
4. COVID-19 Vaccination Roll Out
The successful roll-out of COVID-19 vaccines in the US and other parts of the world has boosted investor confidence and reduced the fear of another economic shutdown.
The Future of the US Stock Market and Volatility Levels
Despite the current market stability, there are still looming concerns for the future of the US stock market. These include:
1. Rising Interest Rates
The US Federal Reserve has revealed that it is considering raising interest rates this year, leading to concerns that the stock market may take a hit. Rising interest rates can harm stock prices, leading to decreased investor confidence and market instability.
2. Inflation
Inflation levels have continued to soar, with some experts predicting that it could exceed 3% in the coming months. If inflation does continue to rise, it could lead to another market downturn and increased uncertainty.
3. Emerging Threats
Emerging threats such as geopolitical tensions, trade wars, and new strains of the COVID-19 virus could pose significant risks to the stability and growth of the US stock market, leading to increased volatility levels.
Conclusion: The Calm Before the Storm?
The current state of the US stock market seems to be one of relative calm, with volatility levels at their lowest since the onset of the pandemic. However, investor complacency and external factors such as rising interest rates and inflation create the perfect storm for significant market volatility in the coming months.
Nevertheless, the stock market remains an essential component of the US economy, and investors should be cautious but remain vigilant as they navigate the ever-changing market trends.
Summary:
The Vix index, which measures the implied volatility of S&P 500 options over the next 30 days, fell to 13.5 this week. It was the lowest since late January 2020, just before the pandemic shut down economies around the world and sent financial markets into a panic. Despite concerns over soaring interest rates and inflation compounded by the uneven global economic recovery, investors seem undeterred. The S&P 500 has returned to bull market territory, boasting a 20% increase or more from its recent low in October 2020.
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A closely watched measure of US stock market volatility has dropped to its lowest level since the start of the coronavirus pandemic, even as investors are concerned about the direction of interest rates and inflation.
The Vix index, which measures the implied volatility of S&P 500 options over the next 30 days, fell to 13.5 this week. It was the lowest since late January 2020, just before the pandemic shut down economies around the world and sent financial markets into a panic.
The VIX has declined since its October peak despite rising interest rates, the collapse of several US regional banks in March and widespread uncertainty about the future path of the inflationwhich remains far above the 2 percent target set by many central banks on both sides of the Atlantic.
Led by a handful of tech stocks, the S&P 500 returned to bull market territory last week, defined as an increase of 20% or more from its most recent low, hit last October. The last time it fell more than 1% in one day was on Feb. 3, Refinitiv data shows.
However, the tranquility of the market may not last long. “Typically, when investors are this complacent, volatility spikes in the coming weeks,” said James Demmert, chief investment officer at Main Street Research.
Others argue that the Vix is no longer fit for purpose given the growing popularity of short-term trading and especially derivatives known as zero-day-to-expiry options. The 1-day Volatility Index was launched in late April in response and has since fallen 4 percentage points, suggesting that even with this measure the stock market is far from nervous.
Bond markets, by comparison, are relatively turbulent. The Merrill Lynch Option Volatility Estimate (Move), which is to bonds what the Vix is to stocks, was “flirting with levels typically seen during the crisis” in March following the Silicon Valley Bank collapse, reported said Kevin Thozet, a member of the investment committee of French asset manager Carmignac.
The Move index has fallen about 70 percentage points to 115 over the past two-and-a-half months, but remains 65 percentage points higher than at the start of 2021 and above its 10-year average of 75.
https://www.ft.com/content/1f01dc70-e472-4139-9d3b-e96715499a34
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