S&P500 Activity Hits 6-Month Low, Stones Throw From Record
This past session offered a clear shift in both realized market activity and expected volatility – both would drop even further into extreme lows. There are still a host of systemically-important and unresolved fundamental issues lurking through the global markets, but the scheduled sparks to thrust these issues and their implications to the forefront have thinned out. The outlook for growth remains the most troubling and accessible threat to the future with the downgrade in 2019 GDP forecasts from the IMF and WTO still ringing in our ears while the former’s Global Financial Stability Report (GFSR) made clear that there were a host of threats that could suddenly unseat the world’s fragile sense of stability. Remarks from the White House’s chief economic advisor that President Trump could push forward with $125 billion in tax cuts with subsequent spending cuts doesn’t exactly earn the enthusiasm the first tax effort had. Perhaps US corporate earnings with JP Morgan and Wells Fargo figures will take the growth focus in a different direction – leveraged corporate profits.
With the fundamental engines cooling off, we naturally finding both implied (expected) and realized volatility are easing across the financial system. The S&P 500-based VIX volatility index is floundering at lows stretching back to early October before the fourth quarter swept through the markets. That has in turn seen the S&P 500 and Dow deflate 5-day (one trading week) average daily ranges to their lowest levels in a similar time span. That is proving frustrating for bulls who are trying to cover the final stretch of the first quarter recovery effort and return the indices back to record highs – less than 2 percent from Thursday’s close. Low volatility usually supports a speculative reach, but the threshold for speculative climb is not as low as it once was. For US indices, the proximity to record high increasingly reflects a record high cost to jump on board and there come serious questions as to how much return that will afford. Dividends certainly won’t compensate for that investment and capital gains (buy low, sell high) is cast in serious doubt after 2018’s fireworks. Meanwhile, rest of world equities (VEU) and emerging markets (EEM) are struggling to overtake the mid-point of their total losses this past year. This does not bode well for a return to the default advance alongside complacency upon which we depended for much of the performance between 2014 and 2017.
Article by DailyFX