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, 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).

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