Increased Volatility in Stocks, Bonds & Crypto

Stocks opened lower again this morning, pushing the VIX Index to 34.5 (see below for details). The worst-performing sector is energy, down 6.6% on the back of falling oil prices. WTI crude fell to $104/barrel on reports that the EU will soften its energy sanctions on Russia. In addition, traders are betting on temporarily lower oil demand from China due to its Covid lockdowns. And I suppose there is one more factor: Russia is discounting its oil in order to unload as much as possible to whoever will buy it (i.e. China). I’d also point out that the crypto group is getting hammered today: Grayscale Bitcoin Trust (GBTC) -14%; Coinbase (COIN) -16%.

Traders seeking to take advantage of swings in the market are keying off of the VIX, selling stocks when it falls under 20 and buying when it surges above 30. We’ll see if that pattern plays out this time. The VIX tracks the options market, revealing whether those options imply higher or lower volatility over the next 30 days. Higher volatility is usually associated with falling stock prices, and vice versa. None of this matters to long-term investors, of course, but it helps explain the day-to-day swings we’re witnessing.

It seems, for the moment at least, that the bond market has adequately adjusted to the Federal Reserve’s planned interest rate increases this year. The 2-year Treasury yield has come off of its May 3rd highs and is now settling around 2.6%. A Bloomberg survey of economists last week suggested the Fed-funds rate will climb to 2.5% by the end of the year. So those numbers match up pretty well. Now, of course we know that inflation expectations also impact bonds. And looking at the Treasury inflation-projected (TIPs) bond market, 2-year inflation expectations have been falling since March. That is, traders predict that one way or another inflation will fall to 4% in that time.

The economy generated 428,000 new jobs in April compared with roughly 380,000 expected. Gains were pretty broadbased among leisure/hospitality, manufacturing, transportation, professional services, healthcare and retail. That tally exactly matches the prior month and underscores strength in the labor market. By the way, these are newly filled positions. There are another 11.5 million open positions out there, which employers are struggling to fill. That said, wage inflation—growing steadily at 5.5% for the last six months—isn’t out of control. I’d characterize this report as goldilocks—not too hot, not too cold.