Mitch on the Markets

June 10th, 2024

Market Volatility Index Is Very Low—Is It Too Optimistic?

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What is Low Volatility Telling Us About the Stock Market?

For much of 2024, equity market volatility as measured by the CBOE Volatility Index (VIX) has been relatively low. Some investors take this as a sign that economic and market-related risks aren’t being fully appreciated.1

Relative to the Previous Few Years, VIX in 2024 Has Been Uncharacteristically Low

Source: Federal Reserve Bank of St. Louis2

The month of April was an exception. Stocks and bonds experienced heightened volatility, likely due to hotter-than-expected inflation data in Q1. The ‘sticky’ inflation prints implied higher-for-longer interest rates, which investors see as detrimental to the value of future cash flows for U.S. corporations. Accordingly, long-duration Treasury bond yields rose and stocks fell in the month, with the S&P 500 shedding -4.1%.

Time to Dig Deeper into Market Risks?

When looking at factors that could cause market risks, it is important to keep an eye on key economic indicators. To help you do this, I am offering all readers our June Stock Market Outlook Report.

This report includes just-released commentary and insights into the market to help you make decisions based on data and fundamentals instead of fears and media hysteria.

You’ll get insight into:

Expert Market Strategy CommentaryEarnings Matter More than the Fed
Zacks Sector Picks—An invaluable resource for asset allocation
Key U.S. Economic Data—The latest numbers and trends, plus key takeaways
Global Market Data—The latest trends in global stock, bond, and commodity markets
Zacks S&P 500 Earnings Insights—Our roundup of the latest market and sector forecasts and trends

If you have $500,000 or more to invest and want ideas on how to invest in a strong market, click on the link below to get your free report today!3

Download Now! June 2024 Stock Market Outlook3

But the spike in volatility didn’t last long.

By May, the VIX returned to low levels, spending most of the month below 13.0, with stocks back in rally mode. Consider that over the past five years, the VIX has averaged about 21.5, and over the long-term has been closer to 20.0. On May 31st of this year, the VIX registered at 12.92. As seen on the below chart of the VIX from 1990 to the present day, 2024’s low volatility is notable relative to history.

Source: Federal Reserve Bank of St. Louis4

Some pundits are labeling this low volatility investment environment as ‘too sanguine,’ with markets pricing in too much optimism about falling inflation, lower interest rates, and a soft economic landing. Low volatility, the argument goes, tells us that investors are turning a blind eye to myriad economic, geopolitical, and political risks swirling around markets today. Some of the risks cited are short-term, like U.S. presidential election uncertainty, while others are long-term, like de-globalization trends resulting in higher-for-longer inflation. Either way, volatility should be higher than it is today, given the state of the U.S. and global economy.

However, I disagree with this assessment for a couple of reasons.

The first is that all of the risks highlighted above—and risks I often hear about in the context of low volatility—are either overblown, too far off into the future or widely known. Many times, it’s all three. For example, citing the risk that de-globalization will drive inflation higher makes many different assumptions about things that haven’t happened yet. There are several examples of countries ‘re-shoring’ production, sure, but global trade has gone up—not down—since these fears started to emerge.

The second reason is that current volatility doesn’t tell us about future risks or opportunities. Equity markets can get choppy for any number of reasons in the short-term, and it does not necessarily mean that a major downturn is in the offing. Remember, volatility is not just about selling pressure—markets can spike upwards, too. Looking at the 1990 – 2024 VIX chart above, readers can see that volatility was very high in the late 1990s, 2003, 2012, and 2021—all banner years for stocks.

Bottom Line for Investors

I do not expect volatility to remain subdued for the entirety of 2024. When it does arrive at some point in the future, it is important to remember that heightened volatility does not automatically mean dismal conditions are ahead. Volatility can happen at any time for any reason, and should ultimately be viewed as a good thing – it’s a normal, natural part of equity investing. Experiencing volatility from time to time means the market is functioning rationally, in my view. It is also important for investors to remember that volatility works both ways – delivering blows to the downside and triumphs to the upside over short periods of time.

When volatility happens, I think it’s almost always best to stay patient and let the volatility run its course.

You may be wondering just how to do this. I believe an important step in doing so is to focus more on the fundamentals over the day-to-day price movements.

To help you, I invite you to download our June 2024 Stock Market Outlook5.
This report includes just-released commentary and insights into the market to help you make decisions based on data and fundamentals instead of fears and media hysteria. You’ll get insight into:

Expert Market Strategy CommentaryEarnings Matter More than the Fed
Zacks Sector Picks—An invaluable resource for asset allocation
Key U.S. Economic Data—The latest numbers and trends, plus key takeaways
Global Market Data—The latest trends in global stock, bond, and commodity markets
Zacks S&P 500 Earnings Insights—Our roundup of the latest market and sector forecasts and trends

If you have $500,000 or more to invest, get your portfolio better prepared for what’s to come by reading this new report today.

Disclosure

1 Financial Times. May 28, 2024. https://www.ft.com/content/a326d543-6320-44db-bc30-2f6ca8fad824

2 Fred Economic Data. 2024.

3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

4 Fred Economic Data. June 4, 2024. https://fred.stlouisfed.org/series/VIXCLS

5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The CBOE Volatility Index (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options. On a global basis, it is one of the most recognized measures of volatility -- widely reported by financial media and closely followed by a variety of market participants as a daily market indicator. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
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