Stock market volatility is suddenly back on radar screens as equities drop for a third day in a row. That doesn’t bode well for the performance of markets, which haven’t seen a pullback of 5% or more since March.
The VIX Index is trading at 17.3 this morning, its highest level in two months, and bouncing from a low of 12.7 last week. While in absolute terms the level is still low compared to history, this week’s surprise spike might cause some of the market forces behind this year’s rally to switch direction.
“We have seen conditions finally within reach of dictating some mechanical selling or deleveraging risk,” Charlie McElligott, cross-Asset strategist at Nomura, said in a note to clients on Wednesday. He added that investors needed to start thinking about the potential risk for larger market moves knocking into volatility-sensitive systematic strategies.
Investors focusing on risk and volatility control strategies, who allocate stock market exposure based on market moves, have been among those buying into the stock market rally in recent months. And while the buying from these types of investors has helped the S&P 500 get within 5% of its all-time high, it could work in the opposite direction if the rise in volatility forces them to slash their equity exposure.
“The market is expecting less volatility than we do as it’s way ahead of what the leading indicators are signaling,” says Gerry Fowler, the head of European equity strategy and global derivative strategy at UBS Group AG. “We don’t expect a spike in volatility until 2024, but even so, it should be higher than what the market is currently pricing as the macro environment deteriorates.”
Stocks in Europe and futures in the US extend their decline on Thursday, following the first one-day drop of more than 1% for the S&P 500 Index in 47 trading days on Wednesday.
This article was provided by Bloomberg News.