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Chart of the week

Equity market projects calm. Rates don’t. Which is right?

Rates and equity markets project two very different outlooks. Our chart looks at the expectations gap.

October 29, 2021

Expected rate volatility turns higher, VIX lower

Source: Bloomberg Finance, L.P., as of October 27, 2021. MOVE Index refers to the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index. VIX refers to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

  • U.S. markets have been choppy in recent weeks as investors contend with competing dynamics.
  • On the one hand, investors have become increasingly concerned that inflationary pressures, once considered by many to be transitory, could be with us for the foreseeable future amid ongoing supply chain bottlenecks. At the same time, S&P 500 companies during the current earnings cycle have reported the third highest year-over-year earnings growth of the past decade.1
  • The chart points to one effect of the competing dynamics: diverging paths for expected volatility in the Treasury (MOVE) and equity (VIX) markets.2 Expected rate volatility has jumped recently to levels last seen around the taper tantrum in 2013 as economic growth has decelerated and the Fed prepares to tighten monetary policy. At the same time, the equity markets have remained relatively sanguine.
  • Returns have followed similar patterns. Following a September pause, U.S. stocks have bounced back. The S&P 500 is up 5.7% in October and 22.6% year to date while the Barclays Agg has returned just 0.1% in October and -1.4% over the same timeframes.2
  • Said another way, the market is telling two very different stories about expectations for volatility across the rates (and, in effect, core fixed income) market and stocks. Both can’t be right. Against this backdrop, investors may benefit in maintaining a style-agnostic, lower-beta approach as the market works through the still-significant macro uncertainties.

  • FactSet, S&P 500 Earnings Season Update, https://bit.ly/3nFldQv. Based on Q3 2021 earnings.

  • Bloomberg Finance, L.P., as of October 27, 2021. MOVE Index refers to the ICE BofAML U.S. Bond Market Option Volatility Estimate (MOVE) Index. VIX refers to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

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