Ours is a market “conditioned to fear rallies more than selloffs and comfortably numb to macro uncertainty.”

So said BofA derivatives strategists including Riddhi Prasad and Benjamin Bowler.

The context: Questions around a relatively resilient equity market at the index level in the face of a historic move in the rates complex.

To be sure, not everything’s resilient under the surface. Utilities, for example, are beset. But low stock and sector correlations have helped tamp down realized volatility, and outperformance from tech heavyweights (amid the A.I. frenzy) supported the broader index this year even as ever higher real rates “should’ve” undercut long-duration equities.

Outside of mechanical factors (e.g., depressed correlations) BofA’s derivatives team pointed to what they described as a “bigger-picture, structural shift.” The Fed’s “constant wielding [of] a high-strike ‘put'” has conditioned the market to “fear upside risk more than downside risk,” the bank wrote.

In other words, market participants still doubt the idea that the Fed would countenance a true crash. Indeed, part and parcel of the steady grind lower for vol following March’s mini-banking crisis was the notion that even as Jerome Powell stuck to his guns on rate hikes, the Fed and Treasury response to bank drama (depositor bailouts and the establishment of the Bank Term Funding Program) were tantamount to a policy “put.”

And, so, the prospect of crash-ups is scarier than the specter of a meltdown. If experiencing a drawdown is unsettling, being left behind while “everyone” else gets rich is outright maddening. The figure below is one way to illustrate the dynamic.

As the chart header notes, Nasdaq 100 vol on up days exceeded that on down days by the most in 40 years in 2023.

That’s indicative of investors “panic-grabbing” for upside exposure and otherwise rushing to jump aboard a moving train into perceived crash-ups.

The only thing to fear, apparently, is missing out.