The Market Brief
U.S. futures edged higher during overnight trading as the U.S. government shutdown continued, following a week in which Wall Street rallied to record highs.
Macro Viewpoint
September will be remembered as a month when a straightforward wager, that successful trades tend to keep winning, delivered its strongest performance in three years across commodities, equities, and foreign exchange markets.
Investors shrugged off worries about the shutdown after lawmakers once again failed to reach a deal on funding to keep the government open this month.
The shutdown delayed the release of key economic data, including the September jobs report, which was originally due Friday.
Vol Dynamics
This past week saw SPX green five days in a row for a return +1.09%. At the same time, VIX Index was up 1.36 points, ALSO notching five consecutive days higher. Since the creation of VIX in 1990, this has never happened before.
We have seen call volumes explode and relentless demand for single-stock options. This has driven volatility higher in the average SPX single stock, which is now bleeding into the overall index.
Vol control strategies entering the convex region
S&P realized volatility has now fallen below 10%, is at its lowest levels since Jul-24, and ranks in its 3rd percentile since 2020. This is critical, as subsequent moves lower in vol will lead to larger leverage increases from vol control strategies.
For example, a 1% drop from 20% to 19% realized vol would increase a 10% vol control strategy’s leverage by 2.6%, while the same 1% drop from 10% to 9% would increase leverage by 11%. Should realized vol continue lower, we’d expect a positive tailwind for the S&P in the near term.
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