The market has been historically calm despite many catalysts for volatility. However, that calm might be coming to a close, with action in November threatening to disturb the peace.
Over the last several months, there’s been a flurry of headlines raising concerns about the stock market. Investors have worried over tariffs, valuations, an AI Bubble, Middle East conflicts, government shutdowns, and more. Yet, the market has been stable the last several months, resulting a historically calm period despite all these catalysts for volatility. However, that calm might be coming to a close, with action in November threatening to disturb the peace for the first time in months.
One of the most common measures of volatility is the CBOE SPX Volatility Index (VIX), which is the expected annualized standard deviation of S&P 500 (SPX) returns over the next thirty days. The index is above 20 as equities sold off in November, placing markets in a more volatile territory than average. Meanwhile, realized volatility over the previous 30 days, which is the actual annualized standard deviation, is at a reading of 11.1 well below the average of 15. The difference between the actual and expected volatility is large right now at around 10 points, occurring in less than 10% of days since Vix’s inception. Previous articles have found that when the market expects volatility to be significantly higher than it has been like our current environment, then investors may be overly fearful, serving as another positive in the market’s favor.
Another way to look at volatility is through the lens of the market’s drawdowns, or its peak to trough decline over a period. The S&P 500 has been within 3% of all-time highs since June 6th, meaning the market has seen almost no downside over the last five months. For context, there are only 6 longer streaks this close to ATHs going back to 1950, meaning we should expect a streak like this around once every decade. Meanwhile, the Nasdaq-100 has been similarly consistent over the last several months. NDX has closed within 5% of its highs since May 13th, which is its third longest streak within 5% of ATHs, with 1995 and 2017 being the only longer instances.
However, due to pullback over the last several weeks, the Nasdaq-100 and S&P 500 are within striking distance of ending their streaks. Investors have likely taken the consistency of the market for granted over the last several months, as a typical environment would’ve seen a decline in the market far sooner. That said, a slight dip doesn’t mean that domestic equities will lose steam. The S&P 500 and Nasdaq-100 were overbought when they set their most recent highs, so recent pullback could be healthy as stocks take a breather. Both SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) hold strong fund scores above 5.0 while Domestic Equities hold the lead in DALI, meaning the weight of the technical evidence continues to suggest long-term strength in the group, even in the face of higher volatility.
