Thus far through March 20th, the S&P is up about 3.42%. That has not been so smooth of a ride perse. January: up 6.18%; February: down -2.61%, and MTD March: down -0.47%. But let us take a look at the VIX and see what we can observe here as it relates to volatility:
Here is a 3-year graph:
And here is a look at YTD:
Volatility has moved higher following the Silicon Valley Bank drama. We think of volatility as a sort of market radar screen, which tends to go up when a new threat emerges and 'blips' on the radar screen. Those blips are the market digesting and analyzing the new threat. In this case, the VIX went from about 18.50 to nearly 26 based on all of the bank uncertainty. A new threat, indeed, but not a VIX spike, necessarily. A VIX of 18.5 represents the market pricing in daily S&P 500 moves of about 1.15%, while a VIX of 26 represents an increase in expectations to daily moves of about 1.6%. Not quite the massive fear we would associate with a VIX spike and market sell off.
Said another way, this seemed like a big deal on the news, and was a big deal in terms of short term bond yields falling and yield curve spreads blowing out - but it barely bled into equity markets and volatility pricing. If anything, this was Bear Stearns early in the GFC, not Lehman Brothers in the heart of it. Graph below 12/31/2007 to 3/31/2009
So, what gives? Investors appear to remain quite bullish, and perhaps now even more so - believing the Fed will now pause or reverse to avoid more bank problems. And believing that's all that matters for the market to go higher. We are not so sure. Perhaps it is wise to remain cautious and hedge against a real VIX spike or market sell off.
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