There's a record-setting disconnect in markets right now - and it has stocks spring-loaded for a recovery
- As the stock market has been whipsawed over the past couple of weeks, bonds have remained relatively calm.
- UBS has pinpointed a statistic related to this that suggests the equity market will head higher over the next three to five months.
As the stock market has been whipsawed in recent weeks, bond traders have been nonplussed.
Consider this remarkable feat of restraint: While the Dow Jones industrial average was turning in a more than 700-point swing on Wednesday - one of its biggest ever - 10-year Treasury yields never budged more than three basis points in either direction.
And that's just one example. Treasurys have remained largely range-bound over the past couple of weeks as choppy trading has engulfed equities.
One measure shows this volatility disconnect is actually at a record, according to UBS data going back to 1990. As the chart below shows, the ratio of implied volatility on the S&P 500, relative to expected price swings in Treasurys, peaked in February and has stayed historically high ever since.
That's great news for stocks, says UBS, noting that the S&P 500 has historically surged 16% in the six months after this measure has hit all-time highs. Further, the benchmark equity index has also climbed 8.6% in the three-month period following a record.
"We see near-term upside in equities as rates volatility has fallen," UBS chief US equity strategist Keith Parker wrote in a client note. "Rates volatility should stay well off the highs."
In further support of their bullish argument, UBS argues that investor nerves in markets outside of equities are actually much calmer than they were during the stock market's 10% correction in early February. They note fixed-income volatility surged along with stock price swings during that instance, which made the situation much worse.
US stocks have already started showing signs of recovery. On Wednesday, the Dow Jones industrial average saw a 510-point plunge erased in a matter of hours, and all major indexes finished up more than 1% on the day. That strength has extended into premarket trading Thursday, with both S&P 500 and Nasdaq 100 futures up 0.5%.
Is this the start of a new ascent into record territory, or just a chance for traders to catch their breath before the next bout of selling? It's anyone's guess, but UBS makes some compelling arguments for the bull case.
