S&P 500 volatility streak longest since '12 as 1% moves multiply

[NEW YORK] Volatility in the US stock market is getting harder to ignore with each passing day, a trend Goldman Sachs Group Inc says is poised for a reversal.

The Standard & Poor's 500 Index rose 0.5 per cent yesterday and moved 1.3 per cent from its lowest to highest levels. That's the 14th straight swing of more than 1 per cent intraday, the longest stretch since an 18-day run ending on June 21, 2012, data compiled by Bloomberg show.

Daily moves in the US equity benchmark have almost doubled from 2014 as oil's decline spurred concerns about deflation and earnings estimates fell the most since 2009. While investors are the most rattled they've been since Europe's debt crisis more than two years ago, an accelerating US economy should calm them down, according to a Jan. 20 client note from Goldman Sachs derivatives strategists.

"The rollercoaster markets have been on has been unsettling for the public at large to see," Mark Luschini, the chief investment strategist for Philadelphia-based Janney Montgomery Scott, which oversees about US$68 billion in assets, said by phone. His message to clients: "Don't let it shake you out of your positions. The fundamentals haven't changed." Even as crude prices have been cut in half since June, gross domestic product grew at a 5 per cent annual rate in the third quarter, the most in 11 years, and the US labor market just capped its best year since 1999.

US stocks rose for a third day as energy shares rallied and speculation grew that the European Central Bank will provide more stimulus. The S&P 500 has climbed 2 per cent following its second five-day slide this year as investors have weighed earnings reports and oil held above an almost six-year low set Jan 13.

The S&P 500 has posted an average move of 0.85 per cent each day in 2015, almost double the daily price change of 0.53 per cent in 2014, the calmest year in US stocks since 2006. Shares in the US benchmark gauge have endured intraday moves of at least 1 per cent every day this year, including one of its most volatile sessions in three years on Jan. 13.

In that period, the Chicago Board Options Exchange Volatility Index has declined 16 per cent from a one-month high. The VIX is derived from the cost of options on S&P 500 and amounts to a forecast for stock swings in the next 30 days.

Goldman Sachs analysts led by Krag "Buzz" Gregory predicted the gauge of trader anxiety will average 16 in 2015, about three points below its closing level of 18.85 yesterday, according to the note. With the current state of the US economy, the VIX's current level should be around 15, the strategists wrote.

"In mid-cycle, the market has overcome many of the residual volatility spikes that occur coming out of a recession and the early stage of the business cycle," they wrote. Equities are also "a safe distance away from the imbalances usually associated with the end of US expansions," they wrote.

'The Norm' Heightened volatility in other markets, especially in oil, is keeping the VIX elevated right now, according to the note. The strategists expect the VIX to retreat with the economy expanding at a rate of more than 2.5 per cent and manufacturing growth strong enough to keep the Institute for Supply Management's manufacturing index between 55 and 60.

"Low volatility is the norm, not an anomaly at this stage of the business cycle," they wrote. "If the economy does remain robust as our economists expect, the gravitational pull for volatility is down, not up, at this stage of the business cycle." Goldman Sachs's prediction for the VIX in 2015 would represent an increase of 13 per cent from its mean of 14.18 in 2014, data compiled by Bloomberg show. If true, this year would be the highest annual average for the VIX since 2012.

Bank of America Corp, JPMorgan Chase & Co and Barclays Plc derivatives strategists predicted in December that daily volatility will increase for equities in 2015. Deutsche Bank AG and Credit Suisse Group AG made similar predictions this month, saying the end of Federal Reserve stimulus and intermittent panic about the rate of global growth will lead to more equity upheaval.

While current VIX levels don't signal panic, they are justified given weakness in other asset classes and speculation around the future path of US monetary policy, according to Eric Augustyn, head of options strategy for Wells Fargo Investment Institute.

"Everybody's been expecting higher volatility and we've finally gotten it," Augustyn said by phone from Charlotte, North Carolina. His firm oversees US$1.6 trillion in assets. "A lot of equity volatility we've seen in the US is related to commodities, currencies and even Europe. I don't think we're extraordinarily high, but we're in a place where the VIX is fairly valued." Even as the US market faces the prospect of continued global turmoil, profit for S&P 500 companies is still forecast to grow 0.8 per cent for the fourth quarter of 2014, according to Bloomberg data. The International Monetary Fund made the steepest cut to its global-growth outlook in three years, with diminished expectations almost everywhere except the US.

"Once earnings start to wash over everybody, the macro stuff starts to go down the list and it becomes more of a company-by-company basis and what managements are saying about their outlooks," Kevin Divney, chief investment officer at Beaconcrest Capital Management LLC, said by phone. "When we come through earnings season, we're going to see that the US economy is pretty healthy."

BLOOMBERG