US equities’ nearly 17% gain year to date has occurred against a 12% decline in trading volumes compared with the first four months of last year and a 7% decline compared with all of 2018.1 This underscores why many are referring to the current environment as a “low participation rally.” But given that 63% of S&P 500® firms will have reported first-quarter earnings by May 32 and there is a Federal Reserve (Fed) meeting scheduled for May 1, trading volumes are likely to get a boost as the calendar flips from April to May.
A Powell-ful punch of volatility
The Fed meeting may be the larger catalyst for action, even if they have adopted a patient stance. Fed Chairman Jerome Powell has proved to be a “volatile” chair so far, and trading volumes five days after policy decisions have been, on average, 7% higher than the preceding five days.3 Under Powell, the CBOE VIX Index (VIX)—otherwise known as Wall Street’s “fear gauge,” as it represents the market's expectation of 30-day forward-looking volatility—is higher by an average of 4.3%4 through the five days following a Fed meeting relative to the five days preceding a Powell-run policy confab.
While these increases may not be a shock, given that Fed meetings act as a macro touchpoint where market-moving news is revealed, comparing these numbers with those from the tenure of Powell’s predecessor suggests a more volatile current environment. The same analysis of comparing the average VIX Index level five days after a policy meeting to the five days prior reveals that under former Fed Chair Janet Yellen, the VIX registered just a 0.8 % increase—not the 4% figure associated with Powell. This isn’t the only data point that indicates a Powell Fed has led to more volatile price action in equities.
In the five days after a Fed policy meeting:5
- The average absolute change value (which reflects the range of price action) in the S&P 500 Index has been 2.6% for Powell, but was 1.1% for Yellen;
- The average net change (which accounts for both gains and losses) in the S&P 500 Index has been -1.2% for Powell, but was 0.1% for Yellen;
- The average change on negative return days only (which indicates the drawdowns witnessed historically) in the S&P 500 Index has been -3.4% for Powell, but was only -1.0% for Yellen.
To be fair, the sample size under Janet Yellen covers more than 30 meetings, while Powell has had only nine. Small sample size aside, however, the Powell-led Fed hasn’t been a picture of stability since he assumed leadership in early 2018. At times, Powell has presented seemingly conflicting diagnoses from interview to interview. For instance, he claimed we were “far from neutral”6 on interest rates in October 2018 and “just below”7 neutral a month later in November, before putting rate hikes “on hold”8 in December.
In a span of three months, the Fed policy viewpoint changed drastically. This level of policy uncertainty was exacerbated when Powell and the Fed became a new presidential lightning rod in the Twitter-sphere. One of the president’s tweets went so far as to say, “The only problem our economy has is the Fed.”9 Powell’s volatility profile, therefore, seems warranted—even if the title has been earned over a short timespan.
Liquidity in times of volatility
With the S&P 500 now bouncing around its all-time high, but market catalysts like earnings and the Fed on the horizon, the current market’s pace of gains could be upended by crosscurrents of both macro and fundamentally induced volatility. With a potential increase in volatility, there will likely be a need for liquidity, and time and time again, ETFs have been an additive source of liquidity within portfolios, allowing investors to express views and transfer risk in real-time across a multitude of asset classes. We witnessed this in the fourth quarter of 2018 during the market’s near-20% correction, when ETFs were seen as a liquidity provider, with $7.6 trillion10 of trades executed on the secondary market, resulting in gross primary market activity of $800 billion.11 The larger secondary market volume underscores the liquidity dynamics of the ETF, as not all trades will filter down to the single stock or bond level; it also underscores how ETFs’ dual avenues of liquidity can create opportunities to improve execution and trading efficiency.
If the markets turn volatile as the calendar flips to May, trading volumes will likely be pushed higher, with ETFs likely leading the way, given that ETF trading volumes have had a 74% correlation12 to changes in the VIX over the past five years.
1Based on Tape A+B+C Volume (MVALUSE Index) per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
2Bloomberg Finance L.P., as of 04/19/2019.
3Based on Tape A+B+C Volume (MVALUSE Index) figure for the five days after a policy meeting than the five days before under Chair Powell, per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
4The CBOE VIX Index is 4.3% higher on the five days after a policy meeting than the five days before under Chair Powell versus 0.8% for Chair Yellen, per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
5Per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
6“Powell says we’re ‘a long way’ from neutral on interest rates, indicating more hikes are coming”, CNBC Oct 3, 2018.
7“Fed Chairman Powell now sees current interest rate level ‘just below’ neutral”, CNBC Nov 28, 2018.
8“Fed minutes show ‘many’ think officials think they can be ‘patient’ on interest rates going forward”, MarketWatch Jan 9, 2019.
10Per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
11Per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research.
12Per data from Bloomberg Finance L.P. as of 04/19/2019 and calculations by SPDR Americas Research based upon the 10 day average trading volume and 10 day average CBOE VIX Index level.
CBOE Volatility Index (VIX)
The VIX, often referred to as the equity market’s “fear gauge,” is a measure of market risk based on expectations of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options—both calls and puts. The VIX volatility measure is meant to be forward looking.