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The market is not as complacent as it looks: Analyst

Investors are paying a high premium to protect against any potential downside move amid the recent market highs, says one strategist.

Twelve-month S&P 500 (^GSPC) puts show “the costs to hedge yourself out for the next year are still exceptionally high,” Stuart Kaiser, UBS head of equity derivatives research told Yahoo Finance Live.

“Even though things are much better and market dynamics are much improved, the options market is not quite as complacent perhaps as the price action at the index level would indicate,” he added.

Kaiser noted the (VIX) volatility index - a measure of market volatility is sitting around the 20 level. However VIX futures beyond January are still around 25.

“So the volatility markets are telling you recently we’ve had strong market performance, but there’s still a lot of underlying risk in the market that it’s quite aware of and quite sensitive.”

He said once the U.S. gets past the Georgia runoff, volatility should decline further.

“Still further out, kind of into the second half of 2021, we still think that that risk premium or that additional kind of concern for the markets is going to be a little bit sticky and take a little while to come down,” he added.

NEW YORK, NEW YORK - DECEMBER 02: A large Christmas Tree is displayed near the Fearless Girl Statue in front of the New York Stock Exchange on December 02, 2020 in New York City. (Photo by Alexi Rosenfeld/Getty Images)
NEW YORK, NEW YORK - DECEMBER 02: A large Christmas Tree is displayed near the Fearless Girl Statue in front of the New York Stock Exchange on December 02, 2020 in New York City. (Photo by Alexi Rosenfeld/Getty Images)

Kaiser went on to compare what investors could see in 2021 to what the markets experienced two years ago.

“2018 was a year where volatility was relatively low, but there were still one or two events where the markets drew down fairly considerably because of uncertainty,” he said.

“2021 might feel a little more like 2018, where volatility is declining in between these sort of ‘events.’ The market behaves very well in low volatility but you still have some things going on,” he added.

“There’s still enough uncertainty out there that we think that risk markets are going to be a little bit cautious,” said Kaiser. “Equity investors, even though they’ve been very bullish the last couple of months, are still going to be just a little bit on edge in 2021 given the scar tissue and the muscle memory we’ve had from what’s happened this year.”

Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre

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