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Meteor Insights

Where has volatility gone?

Back in February/March when the number of lockdowns started picking up pace, equity market traders reacted and brought the FTSE 100 to its knees with a fall from the mid-7000s to a low of below 5000

The lockdown of cities and travel restrictions around the world has left the global economy reeling. Back in February/March when the number of lockdowns started picking up pace, equity market traders reacted and brought the FTSE 100 to its knees with a fall from the mid-7000s to a low of below 5000.

Since then, however, equity index volatility has been steadily trending down and stocks have rallied. In fact, at the beginning of September, the S&P 500 managed to notch a new all-time high. The chart below shows the rolling 30-day historical volatility for the FTSE 100 (UKX), S&P 500 (SPX), EURO STOXX 50 (SX5E) and the MSCI World (MXWO) indices for the last 6 months.

As we can see, after the sell-off, volatility tapered off and remained mostly muted. So, why have we not seen more erratic behaviour over this period? Some of it can be explained by the performance of “lockdown-proof” stocks, a lot of which make up a major portion of equity indices. Amazon, for example, was boosted by restricted access to bricks-and-mortar retail shops. Netflix gained on increased demand due to more time being spent on sofas. The FTSE 100, being more heavily dependent on energy, health and retail, failed to take advantage of the tech rally. Another important factor is that governments have been incredibly accommodating and, using every tool in their arsenal, have sought to mitigate any potential lasting damage. Finally, many investors expect a vaccine to emerge soon, allowing citizens to resume normal levels of consumption.

The relative calm could all be hanging in the balance though. On Monday, markets felt some fresh volatility on the back of the “FinCEN” documents which put the banking sector under scrutiny. The growing threat of a second lockdown due to rising coronavirus cases doesn’t help either. The aforementioned tech stocks are also at unprecedented levels already. It won’t be easy keeping investors happy as the fundamentals need to keep on improving to justify their price tag. Finally, and perhaps most importantly, governments are running out of tools. Taking the UK as an example, interest rates are already near zero and the amount of government spending on financial support schemes is eye-watering.

Then again, we’ve been here before. There’s rarely ever a shortage of volatility catalysts yet stocks have a habit of proving how resilient they can be.

Meteor currently have a range of solutions to suit a range of investment views. The FTSE/S&P Kick Out Plan is linked to the performance of US equity which includes robust tech sector companies. The FTSE Step Down Kick Out Plan provides a solid rate of return whilst accommodating a potentially weaker UK equity picture in the future. Contact sales@meteoram.com for more information or visit our Current Products page on the website.

Posted: 22 September 2020
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