Investors are anticipating a calmer path ahead for U.S. equities as the prospect of two highly effective vaccines takes precedence over the immediate concern of a spike in daily new COVID-19 cases in the U.S. to beyond 150,000.
The CBOE Volatility Index, or VIX, fell to 22.7 on Nov. 17, the lowest level since Aug. 25, having been above 40.0 as recently as Oct. 28 as pre-election uncertainty reached its zenith.
The decline in the VIX, an options-based calculation of future volatility in U.S. stocks, comes as the S&P 500 climbed 10.4% so far in November as the vaccine announcements boosted confidence in the future strength of the economic recovery.
"With the melt-up just starting, we expect the U.S. and other markets to reach record highs over the coming weeks and months, as investors can finally look ahead into next year and beyond with more certainty than they have had for months," Christopher Rossbach, manager of the J. Stern & Co. World Stars Global Equity Fund, wrote in a market outlook.
Goldman Sachs now anticipates the S&P 500 will end 2020 at 3,700, compared with 3,616 today, and reach 4,300 by the end of 2021 as U.S. economic growth recovers to 5.3% next year, according to a report published Nov. 16 by the bank's chief U.S. equity strategist, David Kostin.
However, the VIX is still significantly higher than the sub-20 levels that predominated before the spread of the coronavirus pandemic caused the index to spike to an all-time record level of 82.7 on March 16.
"Investors are torn between expectations for a more normal future with the developments of vaccines and the current situation with the rapidly spreading virus infections and lockdowns, causing more economic pain across the west," Fawad Razaqzada, market analyst at ThinkMarkets, wrote in a market commentary.
Corporate bond spreads tightened sharply at the start of November, returning to late-February levels as the failure of the Democrat party to sweep the U.S. elections increased the odds of further monetary stimulus by the Federal Reserve. But with investors weighing up the possibility that an economic recovery kickstarted by a vaccine potentially reduces the need for monetary stimulus, it was a bumpy ride last week for the ICE Bank of America U.S. high yield corporate bond index spread. The spread rose from 422 basis points on Nov. 9 to 463 basis points on Nov. 13 before dropping back to 450 basis points by Nov. 16.
There was less volatility higher up the credit rating spectrum. The ICE Bank of America U.S. investment grade corporate bond spread was unchanged from a week earlier at 119 basis points as of Nov. 16.
It was also a quiet week in the emerging market corporate bond sector with the spread shedding 2 basis points to 316 basis points by Nov. 16.
The Libor-OIS spread, a key risk indicator for the U.S. banking sector measuring the difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, was largely stable over the last week, edging up to 12.6 basis points as of Nov. 17 from 12.2 basis points on Nov. 10.
In the leveraged-loan market, the share of issues priced below 80 cents on the dollar, a closely watched indicator suggesting a company is more likely to default, fell to 3.8% on Nov. 16 down from 4.35% on Nov. 9 and the lowest level since Feb. 27.