Ebbing Volatility Could Help Stocks Snap Out of Their Funk

In recent weeks, the march higher for broader benchmarks has been more of a slow grind, with some market observers pointing to sluggish, sideways action. That’s not the type of action thrill seekers want to see, but it can serve the purpose of limiting equity market volatility. Additionally, it’s possible that range-bound settings can give way to significant moves to the upside.

“Equity markets look to break out of the recent trading pattern, with the S&P 500® Index starting the week mere points below the record high from a month ago. Investors have wrestled over the past two months on the economic reopening and encouraging data versus elevated valuations, supply-chain issues, and an uncertain path for the Federal Reserve,” notes Nationwide’s Mark Hackett.

Hackett points out that while there are corners of the market currently being fueled by speculative action and euphoria, that behavior isn’t permeating the broader investing complex. That’s a potential positive for investors looking to avoid “gamification” of markets and meme stocks.

Regarding volatility, a benefit of lethargic market action is that volatility gauges typically retreat. That’s proving to be the case in recent weeks.

“Volatility has collapsed in recent weeks, with the VIX below 17 for the first time since before the pandemic. Over the past three weeks, the average daily move for the S&P 500 is just over one-third of a percent, compared with an average of 1.2% since the pandemic,” adds Hackett.

Low volatility can be supportive of riskier assets and that’s evident in the commodities complex where, as Hackett points out, crude oil and unleaded gasoline prices are trading at their highest levels since 2014.

One more benefit of low turbulence, depending on an investor’s factor purview, is that the current sanguine market environment could be supportive of further upside for cyclical value stocks and small caps. There may be something to that thesis as the S&P 500 Value Index is higher by almost 1% over the past month.

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