Stock volatility remained low despite risk events

by Jan-Patrick Barnert

A tense US presidential election, wars in the Middle East and Ukraine, European governments falling apart: Despite a flurry of risk events, equity volatility is heading for its lowest annual average since 2019.  

The Cboe Volatility Index, or VIX, has averaged 15.5 points in 2024, more in line with quiet periods that preceded the Covid pandemic than with the tumultuous last few years. The S&P 500 Index has surged more than 25% in 2024, posting 51 all-time highs, with stock markets from Asia to Europe mostly up. 

The Aug. 5 scare that sent the VIX for a record jump intraday now looks like just a hiccups. Solid corporate fundamentals, easing inflation and central-bank rate cuts have helped global shares reach fresh records, while optimism about artificial intelligence keeps lifting the biggest companies. France’s CAC 40 Index is one of the rare developed-market gauges heading for a drop this year after President Emmanuel Macron dissolved parliament and lost his relative majority. 

“The level of the VIX largely reflects the macroeconomic uncertainty embedded in the economy,” said Garrett DeSimone, head quant at OptionMetrics. “With the exception of a few blips, we have not experienced a sustained liquidity crisis posing systemic risks to the economy, which would be a major driver for above-average VIX levels.” 

The distribution of returns in the S&P 500 paints the picture of a year with little panic or hasty risk reduction. Daily swings — both up and down — didn’t lead to strong outliers, with most price action staying within the norm. The correction in the summer, caused by forced de-risking amid a sudden change in the economic outlook and rates narrative, was an exception, and investors quickly bought the dip. 

Growing options activity has also helped serve as a market stabilizer, keeping spikes brief.

Exchange-traded funds with embedded options-selling strategies have added $30 billion this year, reaching more than $92 billion in assets under management, according to Nomura Holdings Inc. Moreover, investors are increasingly using ultra short-term options, known as 0-DTE, to hedge for specific risk events, helping keep longer-term volatility at bay. 

“From a technical standpoint, correlations have been low, with some of the low volatility attributed to funds engaging in yield capture through covered call strategies,” DeSimone said.

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