Bullish US stock market sits on a bed of tranquility

A closely watched measure of US stock market volatility has fallen to its lowest level since the start of the coronavirus pandemic, even as investors fret over the direction of interest rates and inflation.

The Vix index — measuring the options-implied volatility of the S&P 500 over the next 30 days — this week fell to 13.5. That was the lowest since late January 2020, shortly before the pandemic shut economies around the world and panicked financial markets.

The Vix has fallen from a peak in October despite rising interest rates, the collapse of several US regional banks in March and widespread uncertainty over the future path of inflation, which remains far above the 2 per cent target set by many central banks on either side of the Atlantic.

Led by a handful of technology stocks, the S&P 500 last week returned to bull market territory, defined as a rise of 20 per cent or more from the most recent low, which was hit last October. It last fell by more than 1 per cent in a day on February 3, Refinitiv data shows.

The market’s tranquility may not last long, however. “Typically, when investors are this complacent, volatility surges in the coming weeks,” said James Demmert, chief investment officer at Main Street Research.

Others argue the Vix is no longer fit for purpose given the rising popularity of short-term trading and derivatives known as zero-day-to-expiry options in particular. The 1-day Volatility Index was launched in late April in response, and has since fallen 4 percentage points, suggesting that even by this measure the stock market is far from jittery.

Bond markets, in comparison, are relatively turbulent. The Merrill Lynch Option Volatility Estimate (Move) index, which is to bonds what the Vix is to equities, was “flirting with levels typically seen during crisis” in March following the collapse of Silicon Valley Bank, said Kevin Thozet, a member of the investment committee of French asset manager Carmignac.

The Move index has fallen about 70 percentage points to 115 over the past two and a half months but remains 65 percentage points higher than it was at the start of 2021 and above its 10-year average of 75.