Even with a deadline looming for the U.S. to avoid a debt default, it's been a comparatively calm October for financial markets.
Even with a deadline looming for the U.S. to avoid a debt default, it’s been a comparatively calm October for financial markets.
Daily swings in the Standard & Poor’s 500 Index have averaged 0.78% so far this month, down from 0.9% for Octobers over the last eight decades and less than a quarter the moves in 1929, 1987 and 2008, data compiled by Bloomberg show. Bank of America Corp.’s Market Risk Index that uses options to forecast fluctuations in equities, currencies and bonds reached minus 0.74 last week, the lowest since May 21.
Confidence that Congress will reach an accord to reopen the government and keep debt payments flowing has limited volatility even after the S&P 500 rallied 20% since December and 153% since March 2009. Bank of America’s measure of future risk has slipped from a one-year high of 0.3% in June and is lower than the level from August 2011, when investors faced the another threat of American default.
“There’s a lot less fear,” Jim Russell, who helps oversee $112 billion as a senior equity strategist for U.S. Bank Wealth Management, said by phone from Cincinnati. “Most investors look at Washington now and kind of look through this series of headlines and events. We know you have to reopen the federal government eventually and you have to raise the debt ceiling.”
Of the 10 most volatile months on record for the S&P 500, five were Octobers, according to data compiled by Bloomberg. The most extreme was in 2008, when the S&P 500 rose or fell an average of 3.88 percent a day following the bankruptcy of Lehman Brothers Holdings Inc.
Market Crashes
Stock market crashes in October 1929 and 1987 caused the market to move more than 3.5% a day, on average, data compiled by Bloomberg show. Equities posted a monthly plunge of 20% in the Crash of 1929 prior to the Great Depression and slumped 22% in October 1987, including a 20% drop on Oct. 19, which is known as Black Monday.
Failure to reach a timely solution on the debt-ceiling followed by a default on American government debt would be historically unprecedented, causing investors to sell stocks, Michael James at Wedbush Securities Inc. said. That is prompting hedging with securities tied to the Chicago Board Options Exchange Volatility Index, which increased 2.2% to 16.07 on Monday even as stocks advanced.
“In case something doesn’t occur and there is a technical default, the market could go into a significant short-term decline,” Mr. James, a Los Angeles-based managing director of equity trading at Wedbush, said yesterday in an interview. “Portfolio managers are buying the VIX as a means of a portfolio hedge in case of a default because the potential downside would be meaningful.”
(Bloomberg News)
