13 Moves to Make Before the Market Wakes Up to Risk

The low VIX, which uses options pricing to measure implied volatility going forward, is a reflection of the relative calm of the overall market. Trailing one-month S&P 500 realized volatility is just 9%, its lowest since 2021, and the S&P 500 itself has had only two daily moves of more than 0.6% in either direction in the month of April, including Tuesday’s 1.6% drop.

“Such low realized volatility is reminiscent of an era in which inflation was an afterthought and trust in the Fed put reigned supreme, and another sign that equities are ignoring risks [bond] markets are still warning of,” write BofA equity derivatives strategists.

But there are signs that the calm could soon break. Contrary to the VIX, the ICE BofAML MOVE Index—which measures bond volatility—remains near its record high, a sign that bond investors appear to be more concerned about the risk of a recession.

And while the market is calm, the VIX itself is getting more volatile (yes, there’s an index for that). The
Cboe
VIX Volatility Index, or VVIX, touched 100 on Tuesday, up 25% in a week. Historically, when the VIX is at multiweek lows and the VVIX is at multiweek highs at the same time, the S&P 500 has had negative short-term returns, according to data from Jason Goepfert, chief research officer at SentimenTrader. And the VIX itself tended to spike: “Over the next couple of weeks, the VIX rose after 10 out of 11 signals, and the lone loss was reversed in the weeks ahead,” he writes.

A rising VIX could force so-called systematic funds, which buy and sell stocks based on whether volatility is rising or falling, to dump shares. Such funds have boosted their holdings significantly over the past few weeks as the VIX has declined, per Deutsche Bank strategist Parag Thatte, while other investors appear to have remained relatively on the sidelines. That dynamic has kept the S&P 500 in a tight trading range, with support from below thanks to underweight positioning and systematic buying, and a lid above due to ongoing uncertainty about the medium-term outlook. If the VIX starts to rise, systematic funds could be forced to sell stock, adding to the volatility.

Investors looking to avoid some seasickness could turn to stocks whose trading is historically much calmer than the overall market. They tend to be sellers of consumer staples or other goods whose fundamentals are least affected by whatever may be causing the volatility, but also include healthcare companies and purveyors of essential services.

The S&P 500 stocks with the lowest realized volatility over the past year include
PepsiCo
(PEP),
Johnson & Johnson
(JNJ),
McDonald’s
(MCD),
Coca-Cola
(KO),
Procter & Gamble
(PG),
Merck
(MRK), and
Waste Management
(WM), according to data from S&P Global. There’s also an exchange-traded fund that owns the 100 least volatile stocks in the index:
Invesco S&P 500 Low Volatility
(SPLV).

Rather than trying to avoid the potential volatility, investors could embrace it by buying companies that directly benefit from it. Higher trading volumes that usually occur when markets start to swing more wildly could boost revenue at
Cboe Global Markets
(CBOE),
Intercontinental Exchange
(ICE),
CME Group
(CME),
MarketAxess Holdings
(MKTX), and
Virtu Financial
(VIRT).

Love volatility or hate it—just don’t be surprised when it returns.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com