With earnings reporting season winding down and a temporary Greek debt deal hammered out, stock market attention turns this week to a full slate of economic data and Federal Reserve chief Janet Yellen’s trek to Capitol Hill, where she’ll be peppered with lawmakers’ questions on the economy.
Stocks traded narrowly for several days after the long Presidents’ Day weekend, then moved broadly higher last Friday when European officials announced a four-month extension for Greek debt negotiations.
Europe may be kicking the can down the road, but it was enough to reenergize U.S. stock market bulls. They drove the S&P 500 (SPX) to a fresh record high above 2110. And as the SPX chewed up the charts, the CBOE Volatility Index (VIX), which tracks the implied volatility priced into SPX options, stayed true to form—it typically moves inversely to the broader market. After tipping above 16 Friday morning, VIX came under fire in afternoon action and finished the session at 2015 lows of 14.33 (figure 1).
A retreating VIX isn’t the only sign that volatility is falling. The market’s average daily moves seem to be getting smaller, too. Friday’s 12.78-point gain in the SPX was the biggest move in a week. The average daily move so far in February is 12 points, a big drop from the 18-point average in January.
In other words, actual volatility—and not just the implied volatility in VIX—is trending lower. Figure 2 shows the performance of the S&P 500 against the 20-day historical volatility (HV) of the index. While VIX is based on volatility expectations and computed using an options-pricing model, HV is calculated using closing prices over a period of days (an annualized standard deviation).
As we can see, after increasing in December and January, the 20-day historical volatility of the S&P is trending lower in February. This decline in historical, or actual, volatility is quite possibly an important reason why improving investor sentiment is helping to drive the S&P to record levels even as mixed global headlines swirl.
Deepest Corners of the Economy
So what’s next? It’s a relatively busy week for Q4 earnings, but most of the big-cap names have already reported. In fact, more than 82% of S&P 500 companies are already out with results. The numbers are nothing to write home about. Earnings growth is collectively 6.5% on a meager 1.2% increase in revenue, according to Zacks Investment Research.
A lackluster reporting season was possibly baked into the cake if you consider broad market losses in January heading into the reporting period. That means more recent reports aren’t having the same negative impact as a month ago.
Still, we’re not in the clear yet. The week ahead packs in consumer names including Comcast (CMCSA), Wendy’s (WEN), and a host of retailers, including Macy’s (M) on Tuesday, Target (TGT) on Wednesday, and Kohl’s (KSS) on Thursday. Are consumers spending more, period? And importantly, are they upgrading their spending? Dow-component JPMorgan Chase (JPM) will also be watched as the bank hosts an annual investor day on Tuesday.
The floodgates open on data over the next few days, including inflation, GDP, jobless claims, and durable goods for a peek at the factory sector (see figure 3). Data for existing home sales, new home sales, and pending home sales will be closely scrutinized, as investors want more evidence that job growth is showing up in robust spending on homes.
Yellen’s testimony to the Senate Tuesday and the House on Wednesday could add clarity on the interest-rate front, especially after dovish-leaning January meeting minutes prompted some analysts to push back their expectations for a June rate hike to later in the year. All in all, Much Ado About Nothing when it came to the Fed last week. Will this week be the same? Yellen will likely dance delicately especially in the unscripted Q&A portion, as she won’t want to unhinge markets with a few words.
This barrage of potential market movers begs the question: are stock averages teetering at record highs—and in the tech-heavy NASDAQ Composite’s case, at multi-year highs—strong enough to withstand any shocks and surprises? Let’s find out.