So far this week, the S&P 500 index has moved more than 0.5% (in either direction) in each trading session. If the index moves more than 0.5% today, it will be the first time since June 2013 that the SPX has moved more than 0.5% on every day of the week. That was in the aftermath of the market’s taper tantrum, when VIX spot hit a high of 21.91.
The recent pickup in volatility in the U.S. equity market has followed the increase in volatility in other asset classes. Dan noted the rise in volatility in the currency, bond, and commodity markets in a Morning Word piece on Sept 9th:
The low levels of implied vol in what is perceived to be the safest equity market in the world don’t surprise me in and of itself given the continued accommodation by the Fed and the perceived strength of the economic recovery. But the complacency of U.S. equity investors given the backdrop of volatility in almost every other risk asset in the world is a bit concerning.
The period after the end of QE1 and QE2 were the two times over the past 5 years when the VIX moved above the 20-22 area, which has been a sort of line of demarcation for low and high volatility environments. As we approach the end of QE3, and other asset classes are starting to show signs of more volatile price action, the low volatility regime might soon be ending for U.S. stocks as well. Just Saying.
When we look at the current level of implied volatility across asset classes, it’s one of the rare instances in the past 2 years where the majority have greater-than-average implied vol levels. Here is the snapshot:
Most currency and equity markets have implied volatility above their 52 week averages, with the exception of the Asian indices. On the commodity front, most of them are right around the 52 week average.
Interestingly, while the vol pop of the past few weeks feels significant, most assets still have implied volatility at or lower than the midpoint of the 1 year range. Moreover, that 1 year range has already been low by historical standards. In that context, there is still plenty of room for options prices to increase if the current jitters continue.