Investors seem to be a relatively calm, cool, and collected bunch these days—which may be a harbinger of stock market strength in the coming months.
Consider some recent signs of low market volatility that we have been monitoring:
- The S&P 500 Daily Risk Control 10% Index is an index that’s designed to increase its exposure to the S&P 500 Index as market volatility falls. Today, this index is 66% invested in the S&P 500 Index—more than double the 31% allocation seen last November (see the chart). Moreover, the last time the index’s equity exposure hit the mid-60s was in early 2022.
- The stock market’s “fear index”—the Chicago Board Options Exchange’s CBOE Volatility Index (VIX), which measures the 30-day expected volatility of the U.S. stock market—was at 15.78 on 04/28/23, the lowest level since October 2021.
If the stock market were a big lake, the surface would appear calm and still today. Of course, plenty of action is occurring below the waterline—such as sharply diverging returns among big banks versus regional banks. But up above, it looks like pretty smooth sailing.
This placidness has potentially significant implications for portfolios. Quantitative investors look for data-driven indicators such as low and falling volatility to tell them it’s time to buy equities. If current conditions persist or we see less restrictive Fed policy, these investors will likely support equity prices. Conversely, they may exit stocks quickly if volatility spikes, putting downward pressure on prices.
As always, we will continue to monitor key quantitative and qualitative factors for indications of the market’s direction as well as opportunities to pursue and risks to mitigate.
Disclosure:
This commentary is written by Horizon Investments’ asset management team.
Past performance is not indicative of future results.
The Chicago Board Options Exchange’s CBOE Volatility Index (VIX) is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. The S&P 500 Index is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The S&P 500 Average Daily Risk Control 10% USD Price Return Index seeks to limit the volatility of the S&P 500 to a target level of 10% by allocating to cash. You cannot invest directly in an index.
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