Maximum confidence or complacency? The powerful rally of the stock markets registered during the last month has led one of the market’s early warning sensors to lower its guard and reach extreme levels. The VIX index, which measures the volatility of S&P 500 options, fell below 13 units this Monday, a reading that had not been recorded since mid-January 2020, just before the stock market crash linked to the coronavirus pandemic began. COVID-19.
On October 17, as published by ‘La Información’, the aforementioned indicator reached its highest levels since March of this year when the crisis of regional banks in the US occurred around Silicon Valley Bank (SVB Financial) and Credit Suisse had to be bailed out by the Swiss Government and its rival UBS.
The VIX, also known as the CBOE volatility index or financial fear indicator, measures the magnitude of price changes in a financial asset over a period of time, in this case, using the S&P 500 as underlying, the reference of the American stock markets due to their breadth and capitalization.
It officially measures the implied volatility of the stock market through trading in call and put options. A high VIX indicates strong volatility and the possibility of sharp market movements, while a low VIX suggests lower volatility and stability. He unofficially acts as a kind of oracle of what lies ahead in the short term.
However, there are those who see it as a contrary signal that then follows the evolution of the market because when it reaches extreme levels the market is mostly positioned in one direction and statistics indicate that it is more common for it to end up turning. The rise in the VIX itself is usually accompanied by falls in the stock markets or bad news from a financial point of view.
From pessimism to a calm outlook
After a corrective period of five months, from July to October, the markets have taken a turn towards optimism under the belief that the two central banks have stopped raising interest rates, but above all thinking that the objective of stable inflation has been achieved and the much feared sudden recession has not occurred. Barclays Capital analysts position themselves along these lines in their Outlook Report for 2024. “Our baseline hypothesis is that of a global slowdown rather than a deep recession in 2024. the EU stagnates in the middle of the year due to the delayed effect of the tightening of monetary policies,” they point out.
Part of the explanation that the VIX index has cooled – with a drop of more than 50% from the October highs – is due to the progressive entry of money through ETFs or exchange-traded funds for next year. . According to Bloomberg data, investors have bet heavily on indexing companies with dividends through these specialized vehicles, which have registered subscriptions worth $60 billion in the US in 2023.
However, the stock market recovery has occurred above all in technology stocks. “The positioning, although no longer depressed, is slight and most types of investors have capital available to take on risks again. But of course, if there is a hard landing, there will be a threat of capitulation, given the high exposure to the variable income. of the retail sector in the US”, they explain.
The stability of these listed companies, which build loyalty and encourage the permanence of investors seeking regular income without major fluctuations, has also allowed calm to spread, along with a season of corporate results that has left a good taste in the mouths of investors. great values. The pause of the Fed and the ECB with interest rates has also been a stock market balm.
“We are likely to be past peak rates, which has typically been welcomed by risk markets and means that P/E ratios should be more cushioned. The risk-to-earnings ratio “Bond profitability is also improving, but in the absence of a deep recession, the rate cuts currently being discounted in the US seem too aggressive to us,” they argue from Barclays.
The British firm’s experts still expect an increase in EPS (Earnings per Share) of 4%-5% in 2024 in Europe, which means that credit risk can be manageable in a context of corporate refinancing whose impact on profits will be limited, according to Barclays. However, the bank warns of another variable that can leave any forecast a dead letter.
“Geopolitics, although not the main driver of markets, can lead to episodes of volatility, given the tight calendar of 2024: 45% of the world’s population will hold elections, the wars in Ukraine and Israel will continue, the majority of The economies of developed countries are in a weak budgetary situation and raw materials are stressed,” they warn. The VIX, as almost always, will once again be one of the alarms that rings the earliest.
THE NAIS IS OFFICIAL EDITOR ON NAIS NEWS