Speaker 1: Bloomberg Audio studios, podcasts, radio news. The S and P
Speaker 1: five hundred just had its best first quarter in years,
Speaker 1: and that's thanks in large part to the strength of
Speaker 1: a familiar group of names, including Nvidia, Meta, and Microsoft,
Speaker 1: big tech companies that are investing heavily in AI. Shares.
Speaker 1: Of Nvidia alone, we're up more than eighty percent.
Speaker 2: There have been over twenty records posted by the S
Speaker 2: and P so far this year, and that's on top
Speaker 2: of already at the end of last year the fourth
Speaker 2: quarter being incredible.
Speaker 1: That's Carly Wana. She covers the stock market for Bloomberg
Speaker 1: and she's been chronicling this record setting run. But now
Speaker 1: the investors she's been talking to are trying to figure
Speaker 1: out what will happen next. Will the market continue to
Speaker 1: soar to new heights or will it come crashing down?
Speaker 1: And one indicator they've been watching and Carly has also
Speaker 1: been paying close attention to, is something called the VIC.
Speaker 1: It is the volatility index.
Speaker 2: It is oftentimes thought of as the fear gauge.
Speaker 1: For a while now, the VIX has been pretty low
Speaker 1: and indication there hasn't been much investor anxiety. But in
Speaker 1: the last couple months Carly has spotted something striking. Average
Speaker 1: daily call volume on the VIX has started to rise.
Speaker 2: People are buying more VIX call options, so basically positioning
Speaker 2: for potential advances in volatility.
Speaker 1: Investors are buying market insurance to protect themselves, not for
Speaker 1: a conventional correction, but for something bigger, a potential black
Speaker 1: swan event. So should we be worried that traders are
Speaker 1: preparing for the possibility of a big downturn? Today on
Speaker 1: the show What's driving Markets to all time highs and
Speaker 1: what the VIX tells us about what investors think will
Speaker 1: come next? From Bloomberg, this is the big take. I'm
Speaker 1: David Gerret Carty Wana says, while the market gains we've
Speaker 1: seen aren't particularly surprising, what's been interesting to watch is
Speaker 1: how big they've been.
Speaker 2: Going into the year. The expectations were good. Markets have
Speaker 2: been really propelled by those artificial intelligence stocks. That's still
Speaker 2: the case, although not necessarily as extreme as it was
Speaker 2: at the end of last year, But it was also
Speaker 2: based off of this hope and this expectation for when
Speaker 2: the Federal Reserve would start to cut rates, and honestly,
Speaker 2: the expectations for that have been pretty dashed. For when
Speaker 2: that's going to start happening, and that's been pushed out
Speaker 2: and pushed out. Yet despite that, markets have still gone up,
Speaker 2: and they've gone up quite notably, and a lot of
Speaker 2: it does, in fairness, come from really strong earnings that
Speaker 2: have held up. So evaluations are high, but they're not,
Speaker 2: by some measures, at least completely overstretched and over extended.
Speaker 1: You mentioned those artificial intelligence stocks, So these were what
Speaker 1: were known as the Magnificent seven. And I'm going to
Speaker 1: test myself here. That's Alphabet, Amazon, Meta, Microsoft, Apple, Nvidia,
Speaker 1: and Tesla. Did I get all of them? I think
Speaker 1: you got all of them. I remember last year when
Speaker 1: they were doing so well, there was a lot of
Speaker 1: commentary about how we needed to see that rally broaden.
Speaker 1: Has it broaden more?
Speaker 2: Yeah, it's gotten better. It's still a megacap market. The
Speaker 2: momentum trade, which kind of buys stocks that are outperforming,
Speaker 2: is still going well, and that's still kind of taking off. However,
Speaker 2: we included in our story that at any given trading session,
Speaker 2: about seventy percent of the S and P five hundred
Speaker 2: was moving above its two hundred day moving average. So
Speaker 2: that is pretty significant, especially with what we were seeing
Speaker 2: last year. And also I'll note that the SNP beat
Speaker 2: the NASDAK for the quarter for the first time since
Speaker 2: twenty twenty two, So in twenty twenty three the opposite
Speaker 2: held true. NASDAK beat SNP for each quarter.
Speaker 1: What does it tell us when we see the S
Speaker 1: and P besting or.
Speaker 2: Beating the Yeah, it tells us that investors are buying
Speaker 2: something aside from Nvidia, which is exciting for the other companies,
Speaker 2: not to say they're not still buying in Vidia. And
Speaker 2: I would say too that the magnificent seven stocks that
Speaker 2: you touted, they're stoo doing very well, but there's been
Speaker 2: a little bit of more idiosyncrasies within that group. Tesla,
Speaker 2: for example, has not been as high of a performer.
Speaker 2: Apple actually has had a pretty tough year so far
Speaker 2: from twenty twenty four to now. But I would say
Speaker 2: that it tells us that people are looking aside from
Speaker 2: those mag seven names and putting money elsewhere.
Speaker 1: Could you situate that market performance in this broader economic moment?
Speaker 1: So I'm just curious for what makes this good environment
Speaker 1: for yes, these six seven stocks, but more than that,
Speaker 1: why this seems to be such a good moment for
Speaker 1: stocks right now?
Speaker 2: Right so the economic data actually has come in pretty
Speaker 2: pretty strong. That's something that's been talked about a lot.
Speaker 2: But I mean, jobs are doing well, inflation is coming down.
Speaker 2: There's been some surprises here and there, but the Fed's
Speaker 2: preferred inflation gauge, which came out on Friday, actually came in.
Speaker 2: It came in in line with expectations, So that's a
Speaker 2: signal that you know, inflation is cooling to some degree.
Speaker 2: That could also help the Federal Reserve cut rates on
Speaker 2: the timeline that people are holding up again. Jobs has
Speaker 2: been a very strong indicator for people of the job
Speaker 2: market as holding up, and of course also we have
Speaker 2: factory manufacturing data that by some measures really is coming
Speaker 2: in quite robust. Now, the hard part is in markets,
Speaker 2: data that's strong can fluctuate between being good news and
Speaker 2: good news in the sense that yay, the economy is
Speaker 2: doing good, or good news is bad news because oh,
Speaker 2: the economy is doing good, when will the Fed be
Speaker 2: able to cut rates? So it moves back and forth, right,
Speaker 2: it's kind of a double edged sword.
Speaker 1: There's still a lot of optimism about the economy and
Speaker 1: where the market will go next, but there's always the
Speaker 1: chance of a serious downturn, the break will dig deeper
Speaker 1: into the data that suggests Wall Street is getting more
Speaker 1: concerned about a bigger correction. I've been speaking with Bloomberg
Speaker 1: reporter Carly Wana about how a record setting first quarter
Speaker 1: for the S and P five hundred has left investors
Speaker 1: feeling unsure about the market's trajectory, if stock prices will
Speaker 1: continue to climb, or if the engine driving those gains
Speaker 1: will sputter out or come crashing down. One way of
Speaker 1: reading the tea leaves is an index called the VIX
Speaker 1: that fear gauge. When you look at the VIX, now,
Speaker 1: what is it telling you? What's it telling investors about
Speaker 1: that level of anxiety or fear in the market right now.
Speaker 2: So the kind of longer term answer to that is
Speaker 2: the idea that VIX has been uncharacteristically low for some
Speaker 2: time now. There are a suite of reasons and a
Speaker 2: suite of opinions on why that is. However, what we
Speaker 2: noticed on VIX is that while it is incredibly low,
Speaker 2: there are signs that people are positioning more for potential
Speaker 2: tail risk events. So what that means is that within
Speaker 2: the universe of hedging, you can hedge for you know,
Speaker 2: something minor like a small pullback in broad markets, or
Speaker 2: you can really hedge for things going you know, more
Speaker 2: drastically wrong. Recently, people are buying more VIX call options,
Speaker 2: and that would signal that people's fear about an event
Speaker 2: knocking stocks and causing a pickup in volatility has increased.
Speaker 2: Of course, the caveat is that people positioning around VIXED,
Speaker 2: if not necessarily, always mean that things are going to
Speaker 2: go bad. But if we're going by that traditional relationship
Speaker 2: of VIX and high readings of it signal fear, then
Speaker 2: people buying call options tied to it would signal that
Speaker 2: people think that there is a chance, or feel it
Speaker 2: worth at least protecting against the idea that VIX will
Speaker 2: in fact go up.
Speaker 1: So I'm going to synthesize that and correct me if
Speaker 1: I'm wrong. Yes, you have people betting on or buying
Speaker 1: insurance for something big, a black Swan event, but not
Speaker 1: for kind of a run of the mill correction or
Speaker 1: a small pullback.
Speaker 2: Is that right? Yes?
Speaker 1: And I think too.
Speaker 2: It's important to note in this, and our story got
Speaker 2: at this, but part of the reason why the increase
Speaker 2: in hedging for tailorrist events is interesting is because of
Speaker 2: the way that that relates to how people are hedging broadly, which,
Speaker 2: like you said, the demand for hedges is just really
Speaker 2: really low right now, and it has been so the
Speaker 2: fact that people aren't positioning so much or buying insurance
Speaker 2: so much for a regular shregular old draw down and
Speaker 2: the s and P. But they are increasingly relative to
Speaker 2: the six months prior, in the six months at the
Speaker 2: end of twenty twenty three, buying more contracts that would
Speaker 2: protect them in case things, you know, actually go wrong.
Speaker 2: To some extent, that relationship is interesting, and that relationship
Speaker 2: was kind of the crux of the story that we
Speaker 2: are trying to get at.
Speaker 1: For your running the mill investor someone who's not involved
Speaker 1: in the options world, how much does this matter? Is
Speaker 1: it worrisome that you have people betting or getting insurance
Speaker 1: for a dramatic incident that could.
Speaker 2: Perhaps come, You know, I would honestly say that the
Speaker 2: buying of tail risk insurance it's picking up, but it's
Speaker 2: not like it is incredibly pronounced or incredibly extreme, and
Speaker 2: it's not like people are preparing for a complete and
Speaker 2: utter disaster. It's more the idea that you know, professional
Speaker 2: traders and people who manage a lot of money are
Speaker 2: increasingly positioning for that, but are not necessarily increasingly positioning
Speaker 2: for a regulation year old draw down. And again I
Speaker 2: would go back to the you know, what we were
Speaker 2: saying earlier is that S and P five one hundred
Speaker 2: visit all time highs. It has broken more than twenty
Speaker 2: records in the last three months, and there are not
Speaker 2: any signs that that is necessarily going to go immediately awride.
Speaker 2: There hasn't been a data point or there hasn't been
Speaker 2: an earnings collapse completely, So I would say, you know,
Speaker 2: do with that, which you will.
Speaker 1: But we are at this moment when some investors believe
Speaker 1: it's prudent for them to take out more insurance.
Speaker 2: Look, I guess that the real takeaway here is options
Speaker 2: have become increasingly important as something that not just large
Speaker 2: institutional players use, but a lot more mom and pop
Speaker 2: investors are starting to use these contracts for a variety
Speaker 2: of reasons, whether it's hedging or speculating, or some sort
Speaker 2: of mix of both. But I think the interesting thing
Speaker 2: that you can always glean from options markets is that
Speaker 2: it's positioning. So stocks are interesting the extent that it's
Speaker 2: happening right now and The question is what will they
Speaker 2: do and what's priced in and options are You know
Speaker 2: they're equity derivatives. They're contracts that literally tell you what
Speaker 2: people are betting on or positioning for in the future.
Speaker 1: This is The Big Take from Bloomberg News. I'm David Gera.
Speaker 1: This episode was produced and mixed by Alex Sagura. It
Speaker 1: was edited by Caitlin Kenny and Eric Wiener. Our senior
Speaker 1: producer is Naomi Shaven. Elizabeth Ponso is our senior editor.
Speaker 1: Nicole Beemster Bor is our executive producer. Sage Bauman is
Speaker 1: Head of Podcasts. Thanks for listening. Please follow and review
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