Cryptocurrencies Steal Volatility Away From Stocks

What drives volatility? In equities these days, it turns out, not much. With just 6.8 percent realized volatility in the S&P 500 Index, 2017 marked the least volatile year since 1964. Low correlation among stocks, muted inflation variability and market-friendly central bank policies all played a role. But that hasn't stopped investors from asking, “Who ate the vol?”

We point them in the direction of cryptocurrencies. The volatility of bitcoin was almost 13 times that of the S&P 500 in 2017, a year in which both enjoyed strong price performance but with very different risk profiles. Driving the stability in stocks is an especially strong consensus among equity strategists about the year ahead, as shown in the chart below. This measure is well-correlated to the Cboe Volatility Index, or VIX, indicating that the price of options on the S&P 500 moves higher during turning points in the earnings cycle -- as we saw in 2008 and 2009 -- and lower in periods of stable and positive earnings growth like the present.