One thing that is surprisingly missing from the US stock market is the fear factor despite all the piled-up pain.
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Large swings in foreign currencies and junk bonds are caused by worries in every corner of Wall Street about how rising interest rates will send the economy into recession. However, the CBOE Volatility Index, a fear gauge of investors’ sentiment in the stock market, is holding below levels as seen in previous bear markets.
Bankers and options strategist says the shock crashes of the 2008 September Lehman Brothers collapse or the one driven by Covid-19 in March 2020 sent the VIX surging when investors tried to hedge the risks of volatile swings on both sides. This time the S&P 500 index is staging a descent in a long and orderly manner after it reached a record peak levels at the beginning of the year as Federal Reserve started withdrawing its pandemic stimulus.
This year, the VIX did not break the critical level of 40, considered the peak of the fear signal by several experts. The present market resembles the dot-com collapse. The VIX means a 2% daily movement in the S&P 500 index per PrismFP senior quantitative strategist Talal Dehbi.
According to Dehbi, the current market behavior is similar to the 2000-2002 dot com bear market with no sudden shocks. As a result, traders are not hedging against volatility.
The S&P 500 index rallied 3% on Friday, its biggest gain since May 2020, after a report on easing inflation expectations and a Fed official commenting that recession fears were overhyped.
Edmund Shing, Chief Investment Officer of BNP Paribas Wealth Management, said that not many investors are panicking and buying short-term protections that would result in a higher VIX index.
A few signs suggest they are changing. The VVIX index that measures volatility in options is hovering below 100 and has recently touched its lowest since January 2020. This means that traders anticipate a smoother sailing for the VIX index ahead.
The ICE BoFA MOVE index, a volatility gauge in the treasury market, is hovering near the peak in March 2020 selloff. The same is true of the global FX Volatility Index of JPMorgan, making the equities unique in comparison.
Macro Risk Advisors, Dean Curnutt, says “Move” in the market is exceptionally high as they are linked to Inflation, interest rates, and Fed Monetary policy, citing stock and bond volatility.
Shing said he was surprised that VIX has not risen along with corporate risk indicators such as cost of credit and default swaps protection against defaults which has sharply increased in 2022.
In bear markets, the VIX typically goes up to 45 before the S&P 500 bottoms out. On Friday, it needed around 27.
