Signs of anxiety are returning to the U.S. stock market as it hovers near an all-time high.
The Chicago Board Options Exchange’s Volatility Index has risen 8.6 percent in July to 12.56, poised for the biggest monthly advance since January. That’s led traders to add almost $200 million to the largest exchange-traded fund linked to market swings, data compiled by Bloomberg show.
Concern that the S&P 500’s 39 percent rally since the end of 2012 has inflated valuations and worsening crises in Ukraine and the Middle East have lifted the VIX from a seven-year low at the beginning of the month. For most of this year, equity swings have been muted as stronger economic growth and record corporate profits pushed the bull market into a sixth year.
“It wouldn’t surprise me at all if volatility picked up,” Walter Todd, who oversees more than $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said in a July 28 phone interview. “I still get the sense that investors haven’t really bought into the move” in stocks, he said.
The VIX, which measures the cost of options on the Standard & Poor’s 500 Index, is still down 8.5 percent this year. The S&P 500 has posted no declines that lasted more than three days in 2014, compared with an average of nine a year since March 2009, data compiled by Bloomberg show.
Some of Wall Street’s largest firms are predicting more stock-market swings. Goldman Sachs Group Inc. said in a report last week that equities are at risk of a temporary selloff, citing rising bond yields and high valuations for lowering its rating on stocks.
Investors should seek to profit from a rise in volatility as central banks prepare to tighten monetary policy, Russ Koesterich, the chief investment strategist at BlackRock Inc., said in a Bloomberg Television interview on July 25. The Federal Reserve’s Open Market Committee will scale back its monthly asset purchases to $25 billion from $35 billion on July 30, according to economists surveyed by Bloomberg, keeping it on pace to end the program late this year.
Earnings and a resurgence of corporate takeovers will support equities, according to Patricia Edwards, managing director of investments at the Private Client Reserve of U.S. Bank Wealth Management. Dollar Tree Inc. and Zillow Inc. announced deals yesterday and quarterly profit growth among S&P 500 companies is poised for the fastest increase in three years, according to data compiled by Bloomberg.
“I wouldn’t say that we’re putting on our cowboy hats and saying this is an unstoppable bull, but you have a lot of factors going in the right direction,” Edwards said in a phone interview from Seattle yesterday. The firm oversees $124 billion.
The S&P 500 is about 25 percent above its peak in 2007 and trades at 18.1 times reported earnings, near the highest valuation since 2010, data compiled by Bloomberg show.
Rising volatility has boosted trading in VIX futures. About 384,000 contracts changed hands on July 17, after a Malaysian Airlines passenger jet crashed and Israel sent ground forces into the Gaza Strip. That was the third-highest daily volume on record for the contracts, according to CBOE. The VIX jumped 32 percent that day to 14.54, a three-month high.
The U.S. and European Union will act on stiffer sanctions against Russia as soon as this week as Vladimir Putin’s government is “doubling down” on its support for Ukrainian rebels, an Obama administration official said yesterday.
Upcoming economic data and the Fed meeting may lead investors to trade securities that track volatility this week, according to Scott Maidel, an equity-derivatives money manager at Seattle-based Russell Investments.
The Fed announces its next policy decision at the conclusion of a two-day meeting tomorrow. Investors will get a reading on second-quarter growth that same day, while the government’s jobs report on Aug. 1 may show employers added 231,000 jobs this month. Pfizer Inc., Reynolds American Inc. and American Express Co. are among some 150 S&P 500 companies reporting earnings this week.
“Macro-heavy data such as U.S. nonfarm payrolls, GDP and the FOMC are on deck,” Maidel said in a July 25 interview. “In the short run, tactical hedging and use of VIX-based instruments can be appropriate and assist in managing that risk.”