Eq: Total Market

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.


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.


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