Spiking Volatility Puts Financial Advisors on Notice
In classic September fashion, the S&P 500 is inching closer to correction territory.
The recent wave of market volatility is reinforcing September’s reputation as the scariest month for stocks and could force financial advisors and investors to search for a safe place to hide.
The S&P 500, which is down more than 6% from its August peak and getting closer to correction territory, is starting to reflect growing concerns over the simultaneous upward pressure on inflation, interest rates and the U.S. dollar.
“It’s a changing landscape for stock investors; people were expecting near term rate cuts,” said Deron McCoy, chief investment officer at Signature Estate & Investment Advisors.
McCoy’s reference to the Federal Reserve’s recent signal that interest rates will remain higher for longer, which has shone fresh light on weaker economic data, has become a wet blanket for equities.
The summertime rally that saw stocks ride on the back of hopes about taming inflation and a soft landing for the economy, has since morphed into a “no-landing type outcome,” McCoy said.
“It means, we’re not there yet,” he added. “We’re not done with rate hikes and inflation is still here.”
Volatility, the VIX and Financial Advisors
That rising anxiety is being measured by the Cboe Volatility Index, otherwise known as the VIX. Climbing to around 19 in midday trading Tuesday, the VIX is hitting levels not seen since May.
“Given that the S&P is down 6% [from the recent high], I would have thought the vix would be jumping above 20,” said Paul Schatz, president of Heritage Capital.
“For a decline of this magnitude, the VIX should be higher,” he added. “It’s not really showing enough fear. I think that’s still coming.”
The S&P, which is up more than 12% from the start of the year, was down more than 1% in midday trading Tuesday, at 4,291.
Schatz believes the benchmark could fall below 4,200 over the next few weeks.
“In other words, the window for a bottom is open, but there could be some pain before we get there,” he said.
Jim Carroll, senior wealth advisor at Ballast Rock Private Wealth, said even though market pullbacks can be uncomfortable, investors should not be surprised by what’s unfolding this week.
“We saw two initial bursts of volatility in August as the S&P retreated by about 5%,” he said. “The rally that followed brought the VIX back below 13, which is a level of calm we haven’t seen since before the COVID outbreak in 2020.”
Financial Advisors Tackling the VIX
Eric Metz, CEO at SpiderRock Advisors, is also not surprised by the VIX spike.
“Given the absolute levels of the VIX cooling off over the summer months, the S&P’s September sell off from that low VIX base definitely warrants an uptick in the VIX level,” he said. “It’s important to remember the VIX is still below long-term averages, and given the year-to-date performance, protecting gains this year is more affordable than last year.”
In terms of hedging the current volatility spike, McCoy said the only strategy is to turn toward what is rising.
“Find an asset that benefits from rising rates, like floating rate treasuries, and the energy sector will benefit from the rising prices of oil and energy,” he said. “But the rising dollar is harder because we’re all U.S. dollar investors, but we think the dollar is closer to the top at this point.”
Contact Jeff Benjamin at [email protected] and find him on X: @BenjiWriter