Volatility measures in markets from stocks to currencies have retreated this year—a sign that investors are shedding caution even as uncertainties linger in the global economy.
A measure that tracks expected turbulence in share prices, the Cboe Volatility Index, this week hit its lowest point since Oct. 3, placing the so-called fear gauge back at a level it reached before U.S. stocks descended into the worst quarter in seven years. The options-based index, known as VIX, tumbled 3% this week to 14.46. The measure is down 43% in 2019.
A measure of Treasury market volatility also fell to its lowest level since early October. The Merrill Lynch Move Index has dropped 11% this month as of Wednesday, according to data provider Refinitiv.
The expectations of calm are a shift from last year, when outsize price swings in U.S. government bonds triggered tumult in other markets. This year, comments from the Federal Reserve that it will slow its pace of interest-rate increases have capped volatility across markets and buoyed share prices.
“The depth and intensity of December’s market correction and volatility spike came as a shock to investors,” Alain Bokobza, head of global asset allocation at Société Générale SA, said in a note this week. Now, “a mere two months later,” he wrote, “what looked like a very bad omen in December seems to be being viewed as a minor statistical disturbance.”
Measures of swings in assets from oil to currencies also have fallen. However, some market observers say that investors shouldn’t get complacent. Estimates of the risk of a recession have increased. This week, S&P Global Inc. economists said they forecast a 20% to 25% chance of recession in the U.S. within the next year, up from 15% to 20% in November. Wells Fargo Securities estimates the chances of a recession within the next year are about 40%.
And potential market hazards remain: The U.S.-China trade dispute has yet to be resolved, investors are increasingly concerned about the economic health of China and Europe and the Fed could still resume rate increases. But investors seem to be breathing a sigh of relief. In another sign they are back to embracing risk, wagers that the market will continue to be quiet—bets against volatility—have climbed.
Data from the Commodity Futures Trading Commission as of Jan. 29 show that speculative investors like hedge funds have steadily increased net bearish bets on stock volatility this year, after slashing them all throughout the fourth quarter.
Such bold trades were widely popular ahead of February 2018, when a sudden resurgence in market turbulence caught many investors off guard. Some market watchers said the short-volatility trades exacerbated violent swings in the market at the time.
Société Générale’s Mr. Bokobza warned that the heightened turbulence last year—notably in February and December—is a sign of how quickly market shocks can return. “Two such volatility flares in less than 12 months is no coincidence,” he wrote in the note. “It would be unwise to dismiss December’s volatility spike as a one-off.”