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Markets in a Minute

Charted: Market Volatility at its Lowest Point Since 2020

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Market Volatility at its Lowest Point Since 2020

Market Volatility at its Lowest Point Since 2020

Market volatility has been remarkably low in 2023, apart from the brief shock following the failure of Silicon Valley Bank earlier this year.

In fact, the CBOE Volatility Index (VIX)—a primary gauge for measuring U.S. equity volatility—has fallen to lows not seen since before the pandemic.

This graphic shows how today’s market volatility compares to the last two decades, and the factors that may explain its steadiness, based on data from CBOE.

How is Market Volatility Measured?

The most widely used index to track market volatility is the VIX.

In short, it measures the market’s expectation for price changes in the S&P 500. When investor uncertainty is high, the VIX spikes. For this reason, it serves as a barometer of fear in the market and often has a negative correlation to returns. For instance, when the VIX hit a peak on March 16, 2020, the S&P 500 fell 12% in one day.

Market Volatility: All-Time Highs and Lows

To put today’s market volatility in context, here are the market’s peak periods of volatility, through highs and lows:

DateVIX All-Time HighsS&P 500 Daily % Change
Mar 16, 202082.7-12.0%
Nov 20, 200880.9-6.7%
Oct 27, 200880.1-3.2%
Oct 24, 200879.1-3.5%
Mar 3, 202076.5-2.8%

We can see in the above chart that the VIX skyrocketed in 2020 and 2008 at the height of recession fears.

By contrast market volatility hit all-time lows during 2017, when corporate profitability was high and the S&P 500 was in the middle of the second-longest bull run in history:

DateVIX All-Time LowsS&P 500 Daily % Change
Nov 3, 20179.1+0.3%
Jan 3, 20189.2+0.6%
Oct 5, 20179.2+0.6%
Jan 4, 20189.2+0.4%
Jan 5, 20189.2+0.7%

When investors have muted reactions to the market’s outlook, often market volatility is lower—reflecting mixed reactions to the market instead of a unanimous, surprise reaction to economic data or other factors that could sway investor behavior.

2023’s Volatility in Context

In September, the VIX declined to 12.8, the lowest point since January 2020. Since then, it has hovered near these levels as investors scale back recession fears, and factor in the likelihood of the U.S. economy achieving a soft landing. To date, the S&P 500 is up almost 17%.

Many factors are influencing the market’s relative calmness. Inflation has been moderating, falling at 3.7% in August, down from a peak of 9.1% seen in June last year.

Labor market strength has also played a key role. The unemployment rate hovers near five-decade lows, and wage growth remains above historical averages at 4.3% annually as of August.

Despite 11 interest rate hikes since March 2022, consumer spending remains strong, although savings have declined considerably over the year. Household spending makes up roughly two-thirds of U.S. GDP, a key driver of economic output.

Together, these factors, among others, are influencing investor sentiment. Some may argue that investors are complacent as economic data could be weakening, but so far the resilience of the economy is supporting lower market volatility.

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Markets in a Minute

Visualizing Portfolio Return Expectations, by Country

This graphic shows the return expectation gap between investors and advisors around the world, revealing a range of market outlooks.

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Visualizing Portfolio Return Expectations, by Country

Visualizing Portfolio Return Expectations, by Country

How do investors’ return expectations differ from those of advisors? How does this expectation gap shift across countries?

Despite 2022 being the worst year for stock markets in over a decade, investors around the world appear confident about the long-term performance of their portfolios. These convictions point towards resilience across global economies, driven by strong labor markets and moderating inflation.

While advisors are optimistic, their expectations are more conservative overall.

This graphic shows the return expectation gap by country between investors and financial professionals in 2023, based on data from Natixis.

Expectation Gap by Country

Below, we show the return expectation gap by country, based on a survey of 8,550 investors and 2,700 financial professionals:

Long-Term Annual
Return Expectations
InvestorsFinancial
Professionals
Expectations Gap
🇺🇸 U.S.15.6%7.0%2.2X
🇨🇱 Chile15.1%14.5%1.0X
🇲🇽 Mexico14.7%14.0%1.1X
🇸🇬 Singapore14.5%14.2%1.0X
🇯🇵 Japan13.6%8.7%1.6X
🇦🇺 Australia12.5%6.9%1.8X
🇭🇰 Hong Kong SAR12.4%7.6%1.6X
🇨🇦 Canada10.6%6.5%1.6X
🇪🇸 Spain10.6%7.6%1.4X
🇩🇪 Germany10.1%7.0%1.4X
🇮🇹 Italy9.6%6.3%1.5X
🇨🇭 Switzerland9.6%6.9%1.4X
🇫🇷 France8.9%6.6%1.3X
🇬🇧 UK8.1%6.2%1.3X
🌐 Global12.8%9.0%1.4X

Investors in the U.S. have the highest long-term annual return expectations, at 15.6%. The U.S. also has the highest expectations gap across countries, with investors’ expectations more than double that of advisors.

Likely influencing investor convictions are the outsized returns seen in the last decade, led by big tech. This year is no exception, as a handful of tech giants are seeing soaring returns, lifting the overall market.

From a broader perspective, the S&P 500 has returned 11.5% on average annually since 1928.

Following next in line were investors in Chile and Mexico with return expectations of 15.1% and 14.7%, respectively. Unlike many global markets, the MSCI Chile Index posted double-digit returns in 2022.

Global financial hub, Singapore, has the lowest expectations gap across countries.

Investors in the UK and Europe, have the most moderate return expectations overall. Confidence has been weighed down by geopolitical tensions, high interest rates, and dismal economic data.

Return Expectations Across Asset Classes

What are the expected returns for different asset classes over the next decade?

A separate report by Vanguard used a quantitative model to forecast returns through to 2033. For U.S. equities, it projects 4.1-6.1% in annualized returns. Global equities are forecast to have 6.4-8.4% returns, outperforming U.S. stocks over the next decade.

Bonds, meanwhile, are forecast to see 3.6-4.6% annualized returns for the U.S. aggregate market, while U.S. Treasuries are projected to average 3.3-4.3% annually.

While it’s impossible to predict the future, we can see a clear expectation gap not only between countries, but between advisors, clients, and other models. Factors such as inflation, interest rates, and the ability for countries to weather economic headwinds will likely have a significant influence on future portfolio returns.

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Markets in a Minute

Recession Risk: Which Sectors are Least Vulnerable?

We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.

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Recession Risk: Which Sectors Are Least Vulnerable?

Recession Risk: Which Sectors are Least Vulnerable?

In the context of a potential recession, some sectors may be in better shape than others.

They share several fundamental qualities, including:

  • Less cyclical exposure
  • Lower rate sensitivity
  • Higher cash levels
  • Lower capital expenditures

With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.

Recession Risk, by Sector

As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:

SectorMargin (p.p. change)
🛒 Retail
-0.3
📝 Paper-0.8
🏡 Household Equipment-0.9
🚜 Agrifood-0.9
⛏️ Metals-0.9
🚗 Automotive Manufacturers
-1.1
🏭 Machinery & Equipment-1.1
🧪 Chemicals-1.2
🏥 Pharmaceuticals-1.8
🖥️ Computers & Telecom-2.0
👷 Construction-5.7

*Percentage point changes 2021- 2022.

Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.

Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.

In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.

What to Watch: Corporate Margins in Perspective

One salient feature of the current market environment is that corporate profit margins have approached historic highs.

Recession Risk: Corporate Margins Near Record Levels

As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.

According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.

Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.

Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.

Sector Fundamentals Looking Ahead

How are corporate metrics looking in 2023?

In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.

Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.

For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.

S&P 500 SectorPercent of Companies With Revenues Above Estimates (Q1 2023)
Health Care90%
Utilities88%
Consumer Discretionary81%
Real Estate
81%
Information Technology78%
Industrials78%
Consumer Staples74%
Energy70%
Financials65%
Communication Services58%
Materials31%

Source: Factset

Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.

Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.

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