Volatility’s topical in 2024. Specifically, the absence of it.

There’s no real mystery as to the factors suppressing vol. One such suppressant are the flows associated with proliferating buy-write ETFs. Heavy vol supply’s a corollary of ballooning AUM in derivative income products. That overhang’s a factor in tamping down vol, and long periods of suppressed vol tend to perpetuate themselves.

The “new short vol trade,” as it was dubbed recently by the mainstream financial press, has drawn comparisons to the 2017 short vol bubble, a regime facilitated in part by a handful of retail products which famously imploded in February of 2018. Today’s buy-write ETFs aren’t comparable to the star-crossed VIX ETNs at the heart of “Volmageddon,” but that doesn’t necessarily mean the 2017 analogue’s completely misplaced or useless. If it (the ostensible analogue) has any predictive power (and I’m not saying it does), it’s ominous: 2018 was a roller coaster.

Apropos, SocGen’s Vincent Cassot and Jitesh Kumar asked if markets are “Party[ing] like it’s 2017?” In one respect they are. As the figure below shows, 2024’s well ahead of the 2017 schedule when it comes to fresh S&P records.

“If equities don’t take a breather soon, 2024 may start to resemble 1995 more than 2017,” Cassot and Kumar wrote. “In any case, history suggests that low vol environments see equity markets gradually grind up, and it is advisable to have upside hedges in such circumstances.”‘

Indeed. And market participants have grabbed for upside optionality. The juxtaposition with limited demand for downside protection, and the resultant pancaked skew, was a defining feature of the vol landscape in recent months.

Although correlations between S&P sectors aren’t as low as they were in mid-2017, SocGen said that’s mostly due to a higher correlation between tech and communication services, which I’d suggest “doesn’t count,” so to speak. The figure on the right, below, from the same note, shows the number of consecutive days without a 2.5% intraday range both for US equities and their European counterparts.

US shares, Cassot and Kumar noted, aren’t as calm on that score as they were in 2017, but European stocks “are experiencing an exceptional lack of intraday volatility.”

The figure on the left, above, illustrates the scope of the distortion in 2017, when “index volatility around at-the-money strikes was suppressed due to the gamma flows from vol selling,” as SocGen recalled. There again, 2024 isn’t as extreme.

Finally, the figure below compares realized vol YTD to other years, with the post-Q1 trajectory (“additional vol”) shown in red.

To the extent you can extrapolate from that, the implication is that vol may have a hard time moving significantly higher for the remainder of 2024 which, I’d gently remind you, is an election year.

“If autocorrelation in volatility is to persist, the 10 closest years to 2024 could be a helpful guide to estimate where volatility may end up,” Cassot and Kumar went on, noting that seven of those 10 saw vol end the year less than 12.

Their conclusion (or one of their conclusions, anyway): “We would need to see some unforeseen events for volatility to rise above 20.”

It’s always the seeing of the unforeseen that gets you.