Volatility has crumpled the global stock market this week dampening the appeal for riskier assets. This is especially true as stocks around the world logged in their longest losing streak in eight months on Nov 15. The uncertainty in tax reform, as well as a flattening yield curve, is weighing heavily on the stocks.
Notably, the U.S. Treasury yield curve flattened to a 10-year low, giving warning signs for the broader equity market. The sell-off in the bonds could be a precursor to a larger pullback in the stock market.
The worries deepened with falling oil price that has again led to rough trading in the energy sector. Oil prices have fallen by 4% since hitting the 2015 highs last week following the International Energy Agency’s forecast of weak demand growth, increase in crude inventories and signs that Russia may not be ready to extend the OPEC production cut deal. Additionally, renewed sell-off in other commodities like industrial metals amid concerns over slowing Chinese growth added to the woes.
If these weren’t enough, the U.S. stock market is currently in the midst of the second-largest bull run and one of the most expensive, citing fears about ageing and the stretched valuations.
Given this, the volatility level represented by the CBOE Volatility Index (VIX) jumped 13.3% on Nov 15, and touched its highest level since mid-August. This suggests that market fears have started to set in. This fear gauge measures investors’ perception of the market’s risks and tends to rise during a downturn or when investor panic starts to set in. It is constructed using implied volatilities of the S&P 500 index options, taking both calls and puts into account.
As risks are rising, investors could definitely benefit from this trend. While investors can’t directly buy up this index, there are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven to be short-time winners in turbulent times.