Eq: Total Market
In an article for Bloomberg, Larry Berman discussed recent improvements in stock market breadth, and what it could mean for volatility. One defining feature of the stock market rally has been the limited participation as the bulk of gains have been driven by the tech sector and a handful of mega cap stocks.
But, this is now changing as economic data continues to come in better than expected, and more parts of the market are joining the rally. According to Berman, this is an indication that the market rally could be in its early innings which means that recent weakness in volatility is likely to linger.
Berman labels this as a ‘bullish divergence’. However, he notes that future contracts of volatility are not yet depressed as the front-month contract. This is an indication that the market does expect volatility to pick back up in the second-half of the year which is also consistent with many analysts who see the economy falling into a recession by then.
He believes that some sort of catalyst is necessary for the bearish scenario to develop which isn’t evident at the moment. This is especially the case as many of the ‘risks’ faced by the market at the start of the year haven’t materialized.
Finsum: There’s an interesting divergence in the market with front-month volatility depressed, while future contracts remain elevated. However, improving market breadth may signal that future month contracts may also move lower in the coming weeks.
Nickel and diming it? Not the global ESG Reporting Software Market. Uh uh. The bottom line tells the story: from burgeoning 0.7 billion last year, it’s expected to jump 1.5 billion by 2027, according to a new report by MarketsandMarkets, reported esgnews.com.
Among other factors, a leapfrog in the adoption of cloud-based solutions and services across verticals, as well as a spike in corporate data volume, are the most significant aspects fueling the acceleration of the ESG Reporting Software Market.
Meantime, not quite hitting the mark, you say?
While sorely needed transparency will emerge from a proposed European Union shake up of the ESSG ratings, it will fail to address the standardization indispensable in eliminating the scores causing confusion among investors and companies, according to some in the market, reported reuters.com.
The market for evaluating the ESG performance of companies? Its exploded. That’s because of the money socked into products marketed as sustainable by investors.
"By opting for transparency over standardisation, the EU's proposals are a promising blueprint, but they must go all the way," said Daniel Klier, CEO of data provider ESG Book.
One of the surprising developmentds of 2023 has been the strength in equity markets and subsequent decline in volatility. Currently, the VIX is trading at its lowest levels in the last couple of years despite many headwinds such as a slowing economy and a hawkish Fed.
In Barron’s, Nicholas Jasinski discusses whether the decline in volatility is temporary or will it be sustained for the rest of the year. He notes that many of the market’s worries have eased such as Republicans and Democrats coming together to raise the debt ceiling, the regional banking crisis has seemingly passed, and economic data continues to come in better than expected.
On top of this, investors have been on the sidelines with most inflows into fixed income or defensive strategies, while short interest also remaisn elevated. The net result is that the S&P 500 is up more than 20% from its October lows, and many believe a new bull market has started.
Whether these gains will sustain and volatility will continue trend lower will depend on factors like inflation, the Fed’s rate path, and credit conditions. However, it’s clear that the market has climbed the bulk of its ‘wall of worry’.
Finsum: Volatility is at its lowest levels since before the bear market began. How it will fare in the coming months will depend on inflation, the Fed, and whether credit conditions continue to tighten.
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One of the most puzzling aspects of markets in 2023 for investors has been the relative weakness in volatility. This is despite a plethora of risks for the economy and markets including rising recession risk, elevated levels of inflation, a hawkish Fed, deep stresses in the banking system, and a looming debt ceiling standoff that seems certain to go till the deadline.
Yet, stocks are at their highest levels in more than a year, while volatility is at its lowest level in a couple of years. In an article for the Wall Street Journal, Caitlin McCabe discusses the potential impact of quant funds on volatility, and why it could potentially account for the discrepancy.
Basically, quant funds have been piling into stocks even though most investors remain on the sidelines. Currently, these funds have a net exposure level to stocks that is the highest since December 2021, before the bear market started. In contrast, investors have a relatively low allocation to stocks and have reduced it this year.
Some see risks in the concentrated positions of these quant funds which increase the odds of a market dislocation in the event of bad or unexpected news. Another factor in reduced volatility has been steady inflows from corporate buybacks. Overall, it’s been an exceptionally calm stretch with less than a 1% move for the S&P 500 in 36 out of the last 46 sessions.
Finsum: One mystery for markets in 2023 has been the steady drop in volatility despite growing risks. One potential reason may be quant funds which are aggressive buyers of stocks.
A perplexing situation is the sanguine state of volatility despite a torrent of risks and negative headlines such as deep stress in the banking system due to an inverted yield curve, rising recession risk, inflation, a hawkish Fed, geopolitical concerns, and a looming debt ceiling deadline.
In Barron’s, Lauren Foster covered some recent comments from Vanguard on the debt ceiling and its impact on volatility. According to the asset manager, more volatility is likely but there’s little to worry about in terms of a default on the debt as it believes an agreement will be reached. However, it sees volatility rising into the deadline.
It also believes that the deadline could be shifted later or that a temporary agreement could be reached. Even if a technical default happens, it’s unlikely that the US would not meet its obligations but it could affect the timing of a payment. But, the asset manager doesn’t think that investors should worry about this scenario. Instead, they should focus on good risk management practices and sticking to their long-term investment plan.
Finsum: Volatility has remained subdued despite the market facing considerable risks. Vanguard shares its perspective on the matter and how a debt ceiling breach would play out.
There are considerable headwinds facing the stock market and economy such as a hawkish Fed, uncomfortably high inflation, debt ceiling deadline, an upcoming election year, increasing risk of a recession, a potential regional banking crisis, and geopolitical tensions.
Yet, the volatility index has trended lower for much of the year and is now at its lowest levels in over a year. Ron Isbitts covered this matter and why it could be an opportunity for ETF investors in an article for ETF.com.
If investors believe that volatility is mispriced, then there are some different volatility ETFs to consider. The ProShares VIX Short-Term Futures ETF offers exposure to volatility over the next 1-2 months. The ProShares VIX Mid-Term Futures ETF holds volatility contracts with a duration of 3 to 6 months.
There are also ETFs for those with a variant view. The ProShares Short VIX Short-Term Futures ETF moves inversely to volatility, allowing holders to profit from falling volatility. For those who want to generate income from volatility, the Simplify Volatility Premium ETF also tracks volatility but also produces a dividend for holders.
Note that these ETFs tend to have slippage, high costs, and underperform the S&P 500 over the long-term. Thus, they are best used tactically and with discretion.
Finsum: Volatility is declining despite several potent risks for the market. There are several options for investors to consider.