Don't Sweat the Volatility. It's Time for Risk, Cantor Advises

  • Still too early for sell-off to ‘take on a life of its own’
  • Volatility in stocks hasn’t spread to other assets: Cantor

It’s time to take on risk in U.S. equities, Cantor Fitzgerald says.

Index volatility is signaling more concern than actually exists in the market because it’s been boosted by purchases to close out short-volatility positions, Cantor strategists led by Peter Cecchini wrote in a note on Tuesday titled “It’s Time to Re-Engage Risk.” And the jump in interest rates that contributed to the turmoil last quarter has faded for now.

“U.S. equity volatility (particularly the S&P 500) remains unjustifiably dislocated from volatility in most other asset classes,” the strategists said. In particular, it “remains rich to high-yield credit spreads.” The same situation is found comparing U.S. equity volatility to currency fluctuations, they wrote.

While the correlated dumping of stocks could broaden, the strategists said “it’s too early -- even this late in the cycle -- for the sell-off to take on a life of its own.” Similarly, volatility is unlikely at this stage to “march higher without respite,” they wrote.

The analysts recommended using options strategies such as a call spread to bet on a reduction in volatility.

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