Inside Markets — Realized Equity Volatility

US equities begin the week lower as investors digest the weekend’s geopolitical developments in the Middle East. The bullish trend in the S&P 500 would be interrupted at levels below 4980. In the meantime, we remain generally constructive on US equities.

Realized equity volatility as measured by the CBOE Volatility Index (VIX) has remained at subdued levels (<20) since late October. Volatility has remained low thanks in part to a benign macro environment characterized by resilient growth, falling inflation and the promise of Fed rate cuts. Low levels of volatility tend to generate higher valuation multiples (SPX now ~21x forward EPS), but the benign macro environment is now being challenged and the threat of higher volatility is our key concern. We’ll  become more defensive when the VIX rises above 20 with levels north of 30 usually taking months to unwind.