The hottest topic in the market is… boredom.
Seriously, very little is happening in markets, so that’s what people are talking about.
This was the title of a recent Morgan Stanley research report:
A separate Morgan Stanley economist wrote this weekend: “…the in-crowd tells me that boring is the new cool.”
And to quantify the boredom, people are pointing to the VIX, which is an index that attempts to measure volatility in the market by looking at options activity.
As you can see, it’s basically at all-time lows.
So what’s going on?
One popular notion is that the central banks have “crushed” volatility, by keeping their hands aggressively on the market.
In a note to clients last night, BTIG’s Dan Greenhaus (@danBTIG) argues that’s not really the right way to think about it.
He posts this chart comparing the VIX to a measure of financial conditions.
We spent last night weighting in on vol and won’t do so tonight other than to again advance the below chart. Volatility has nicely tracked out the increase and decrease in financial conditions. People like to say something like “the Fed is crushing vol” but an equivalent statement might be “the fed is improving financial conditions and by extension, volatility has been reduced.” Doesn’t sound as dramatic though.
So basically, financial conditions are improving nicely (something we’ve seen via other credit indicators) and as such volatility is going down.
There’s another point, which is key, which is that the VIX itself is a limited measure. Bloomberg’s Matt Levine has a great column pointing out a few things, one of which is that the VIX is just a one-month measure of expected volatility, so if you expect volatility to surge in say, 6 months (which is the kind of time frame several Wall Street economists are pointing to) then the VIX captures nothing. Bigger picture though is that the measure basically mirrors past realised volatility. So if we just had a very quiet month, then traders are likely to forecast a quiet month ahead. Anyway, the whole post is useful.
Big picture though: Markets are quiet (not just stocks, all big markets), and it seems that financial conditions are in some of their best shape in a while, and that’s depressing volatility.