Volatility By Sector
The average daily point move in the S&P 500 Index over the past twenty days has been just 3.9 points, or about 0.3%. The market simply isn't moving much from one day to the next. Consequently, the actual or realized volatility of the S&P 500 (during the past 20 days) has fallen to only 6.2%. By way of comparison, it was near 20 percent in August.
The decline in actual volatility has been seen across a variety of sectors. 20-day actual volatility of the Technology Sector Fund (XLK), the Industrial Select Sector Fund (XLI), and Basic Materials Fund (XLB) all have actual volatility in the single digits. The Financial Select Sector Fund (XLF) and the Energy Select Sector Fund (XLE) are the only two sectors seeing double digit levels of actual volatility.
While the market might be priced for an uptick in volatility going forward, the relatively low levels of actual volatility have happened for several important reasons.Steady trading in the equity market is being supported by low inflation, low interest rates, accommodative Fed policy, and improved earnings. Estimates compiled by Standard & Poor's suggest that S&P 500 companies could earn $45.45 over the next two quarters. During the past two quarters, earnings totaled an estimated $43.40. The S&P 500 is therefore trading at a reasonable P/E ratio of 14.5.
The primary focus going forward will be on the flood of earnings reports due out over the next few weeks. Three Dow components - Intel, Alcoa, and JP Morgan - released results this week, but the floodgate on fourth quarter earnings doesn't open until after the Martin Luther King holiday. Low levels of actual volatility and a higher S&P P/E mutliple can only be supported by positive earnings growth and, on that front, the outlook is a bit less bullish.