Is This Time Different?
February 26, 2024
Nilesh Jethwa
CEO of Marex Solutions
The S&P 500 reached the magic 5K level this month, a new record. However, taking a step back, two trends stand out to me in the global equity picture:
(a) How the outperformance of tech stocks is extending beyond the U.S.
(b) The decline of implied volatility, and how cheap it has become to buy protection.
European stocks are starting to display a similar pattern to the U.S. “Magnificent Seven.” Thanks to companies like ASML and SAP, the EuroStoxx tech subindex (SX8E) has started to pull away from the pack. Similarly, flows into tech stocks remain a strong tailwind for the Japanese Nikkei which just beat its record set in 1989. In the U.S., meanwhile, surveys show investors are the most allocated to the sector in several years.
BofA Survey Shows Investors Are All In on US Tech Stock Rally
In other words, investors are already overweight tech, and becoming increasingly so.
On the volatility side, the cost of buying downside protection on the S&P500 is around the lowest it has ever been. This comes down to several factors, including: (a) systematic volatility selling by institutions, (b) growing retail interest in the vol space, for example, zero-days-to-expiry (0DTE) options, and (c) volatility selling products like the SVIX ETF (the type of product that caused the “Volmageddon” of 2018, when the VIX doubled in one day.)
In short, investors are getting more overweight large-cap stocks while also showing limited appetite for protection, even at historically cheap levels. In fact, the put-call ratio for the S&P500 is back to levels not seen since the meme-stock mania in 2021. Not even the hawkish re-pricing of the Fed was enough to stop the euphoria.
It’s not my place to say if the market is complacent or overconfident. NVIDIA claims AI has reached a “tipping point.” We’ve seen equities rally when rates have gone up and equites rally again in the expectation rates will go down. The geopolitical uncertainty is being brushed off. Equities could be set for another significant leg upwards, and no-one wants to watch from the sidelines.
From where I sit, however, we’re starting to see investors exploring using this low volatility to start to protect their gains. Asymmetries in market structure always create opportunities.
The best time to get insurance is typically before your house starts burning.
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