October, 18, 2023 - read
"One is never afraid of the unknown. One is afraid of the known coming to an end.”
- Jiddu Krishnamurti
Fear is an emotion, but there are proxies for it in the market. One is the VIX index for stocks, and the other is the MOVE index for bonds. In typical fashion, fear is accompanied by confusion because one cannot buy the VIX1, one can only buy futures on the index; the MOVE2 index doesn’t even have that much. So, we have market observables, but no prices to accompany them. The corporeal forms of both indices are unavailable to the investor – one can only access their ethereal counterparts at best.
Fear is endemic inside the markets, and its levels ebb and flow with sentiment driven by successive sentiment, which, of course, has economic, geopolitical, and other exogenous factors. To add to the complexity there is fear associated with stocks and fear associated with bonds. They are not the same and are not driven by the same factors all the time. The VIX is represented by the blue line in the chart and the MOVE is represented by the white line. Of note are the spikes around the time of COVID in March 2020. Sometimes the spikes lay on top of one another, sometimes they do not. In the most recent past one can see the divergence of the two and the MOVE gets more and more elevated while the VIX remains somewhat range bound.
The most recent bout with fear is not in the stock market (VIX) but in the bond market (MOVE). It would be natural to attribute this to recent geopolitical events, but the gradual trend up in the calendar year betrays that assertion. A subtle point concerns levels and changes in levels (percent versus absolute deviation). It is clear that although the stock market level has increased over the past few years, the changes are such that the percentage changes in the levels are relatively constant. That is, if the market is at 100, a 10% change is 10; if the market is at 150, a 10% change is 15. The bond market is not exhibiting this, that is, the absolute changes in levels are becoming larger; in our example, a level of 100 might be accompanied by a change of 10, but a level of 150 might be accompanied by a change of 30. Coming off zero interest rate policy, this might make some sense, but that doesn’t cause the MOVE index to mitigate. Treasuries are usually seen as a “safe haven”, but the MOVE index in recent months suggests that this safety is not as stable as it once was. The proverbial “flight to safety3” might be interpreted as a flight from risk to less risk and not necessarily safety. Our quote from Krishnamurti reflects the reality that the quiet, safe retreat of US Treasuries might be coming to an end with increasing volatility as measured by the MOVE index.
Diversification can help this situation. Diversifying beyond stocks and bonds means a step into the alternatives asset class. Alternatives can help, but Trinary Capital believes in a risk-managed approach to alternatives. A shotgun approach to the selection of alternatives could have an adverse effect. Investors need to be thoughtful and considerate when investing in alternatives.
1 Cboe Global Markets (Cboe) VIX of VIX (VVIX) Overview (investopedia.com)
2 MOVE Index Definition | Forexpedia™ by BabyPips.com
3 What Is Flight to Quality in Investing? Definition & Impact - TheStreet
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