Volatility for Stocks Stays in Check

By Saumya Vaishampayan 

        U.S. stock investors haven't had much need for those crash helmets.
        After an extended period of relative calm in the market, many investors came into 2015 bracing for a return to wide price swings. The fear was that when the Federal Reserve got closer to raising interest rates for the first time since the financial crisis, stocks would start to see more frequent, steep declines. Many thought the Fed would by summer be close to pulling the trigger.
        Instead, as the S&P 500 ground to fresh record highs, the index hasn't had a single move, up or down, of 2% this year, compared with three such swings by this time in 2014 and two in 2013.
        The market's "fear gauge," the CBOE Volatility Index, or VIX, has been bouncing near low levels seen before the financial crisis. That reflects diminished concerns of a selloff.
        Increasingly, investors say it is looking like the stock market could be in for many more months of muted swings.
        The primary reason: The U.S. economy is growing, but not at a fast-enough pace to prompt an immediate move on interest rates from the Fed. And whenever the Fed does lift rates, its moves are expected to be gradual and well-telegraphed.
        Meanwhile, aggressive monetary-policy easing in Europe has soothed fears of a resumption of eurozone turmoil that could spill over into U.S. share prices. And the steep drop in oil prices, which crushed earnings of energy companies, has at least temporarily reversed.
        "We're all sitting here saying 'Here are all the things that could set off the gas explosion in the basement,' " said Ed Walczak, portfolio manager of the Catalyst Hedged Futures Strategy Fund, which has about $850 million under management. "But nothing has happened yet."
        To be sure, the S&P has posted more 1% moves so far in 2015 than it did in the corresponding period last year. And some think investors risk being complacent about the potential for stepped-up stock-price swings.
        George Hashbarger Jr., a portfolio manager who helps oversee $149 million at BPV Capital Management, was among those expecting higher volatility heading into the year, similar to episodes in October and December of 2014.
        While the forces contributing to higher volatility have faded, he thinks it will be a short-lived respite. Oil prices could renew their decline, he said, and the Fed will remain a catalyst for volatility. "When the interest-rate increase gets closer, there will be fears of that again," Mr. Hashbarger said.
        For now, though, economic news such as last week's jobs report and Wednesday's soft retail-sales figures are keeping a lid on expectations for a Fed rate increase and stock-price volatility.
        Federal-funds futures, used to place bets on central-bank policy, show investors and traders see no chance of a rate increase at the Fed's June meeting. Those odds stood at around 20% at the end of last year.
        Similarly, fed-funds futures imply a 5% chance that the Fed will raise rates in July and a 21% chance of a move in September. The most likely "liftoff" date for rates is now seen as in December.
        Against this backdrop, the relative calm in the stock market can be seen clearly in the VIX, which is based on prices of S&P 500 options. Investors tend to rush to buy those options when they are fearful of a selloff, lifting options prices and the VIX.
        The persistently low VIX is the latest sign that investors are growing weary of paying for options protection in a stock market that keeps grinding higher.
        "People who have paid up for options in anticipation of volatility have always lost money in the last three years, so as a result no one is anxious to do it anymore," said Mr. Walczak.
        The VIX hasn't closed above its 10-year average of 20 since Jan. 30, when sharp swings in currency and energy markets unnerved investors. From there, the VIX cruised to its lowest close of the year at 12.29 on April 24, as the S&P 500 ended at an all-time high. It finished Wednesday at 13.76.
        "It wasn't that long ago that, on the low side, you'd see 17 [for the VIX], and on the high side you'd see 25, in a range-bound market," said Ron Egalka, president and chief investment officer of Rampart Investment Management, which oversees $1.1 billion. Ultimately, he said, if the bull market continues, the VIX will stay low.
        Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com
        (END) Dow Jones Newswires

        May 13, 2015 19:17 ET (23:17 GMT)

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