Boring stocks are the only reason the S&P 500 is up in August, and that’s a little scary
So-called low volatility stocks are up a lot while more volatile ones are down. This is not the usual state of affairs.
After a rollercoaster ride, the S&P 500 is up about 2.5% over its past 21 days (roughly equivalent to one month in trading time).
But what’s unusual is which stocks have risen and which have gone down.
So-called high beta stocks — those that are supposed to move more than the market does — are slightly lower over this period, with low volatility stocks posting strong gains.
This is not the usual state of affairs. Typically, stocks go up and high beta stocks do better than their low volatility peers.
High beta stocks are categorized as high beta stocks because they tend to behave like the S&P 500 on steroids: the market goes up, they go up by more, and vice versa.
The opposite for low volatility stocks, which are typically the “a little bit softer now” version of the overall market.
If we look just at periods when the S&P 500 is up 1% over a month, only 6% of the time high beta stocks are doing worse versus low vol stocks than we've recently seen.
This odd dynamic may be a function of the unusual market conditions: the sharp decline and furious bounce back. High beta stocks far underperformed on the way down in early August, and have since meaningfully outperformed on the rebound.
In this light, it could reflect timid investors amid still-unresolved jitters on the state of the economy that have been only partially soothed by the high visibility into rate cuts from the Federal Reserve coming soon.
Conversely, you could come to the exact opposite conclusion. Chipmakers are very well-represented in the high-beta stock index at present, and those were a very popular trade that came under outsized pressure during what seemed to be a more technical than economically-driven market tumult.
A market led by low vol has some less-than-stellar implications for near-term returns, though is by no means a harbinger of doom.
The median forward 21-session return for the S&P 500 following periods in which low volatility stocks are meaningfully outperforming high beta stocks during a market rally is 0.8% (versus a 1.2% median monthly increase for the S&P 500).
The skew is also less favorable: for all periods, the 25th percentile 21-day rolling return for the S&P 500 is -1.4% and the 75th percentile return is +3.4%. After low vol-led rallies, the 25th percentile return is -2% and the 75th percentile return is 2.5%.
