The chart below shows the rolling three-month change in US search activity by investing topic. Small investors have put a stop to searches for the boring old stock market, while going full bore into commodities and cryptocurrencies. Note we modified our process for removing noise and seasonality from search trends, resulting in slightly different results than the last update.
The ‘spring of nothingness’ has seen implied volatilities across all major financial assets fall back below long-run averages. In other words, the pandemic’s impact on volatility has essentially been erased heading into June 2021. As previously commented, investors expect lower volatility among high yield than investment grade corporate bonds! Yes, there is quite the duration mismatch, but surprising nonetheless.
All in all, covering markets has largely been a slog, while tracking the real economy has been gripping.
Sentiment concerning economic growth as measured across financial and major TV news has begun to recede from ultra-enthusiastic levels. However uncertainty in the language used during these discussions has yet to appreciably rebound, hence the tranquility permeating throughout markets.
Small investors’ shift away from bullish search topics has historically been a harbinger of drawdowns and/or volatility. The chart below shows the spread between the rolling three-month changes in bullish minus bearish search topics. Are investors simply chasing the shiny new objects offered by crypto and meme stocks? Or do investors feel much of the good news has already been priced into markets? Just like our other post for today covering tight trading ranges across sovereign yields, risk assets appear ripe for a rebound in volatility no matter the outcome.