Value beat growth and small caps beat large in a reversal of recent market action — likely an indication of short covering and bottom fishing in some names, not a new trend.

Volatility falls, still high 
Despite the gyrations this past week, realized volatility is actually falling. While an encouraging sign, it remains incredibly elevated, with the CBOE Volatility Index (VIX) in the mid 60s compared with about 14 at the end of 2019.  Two-week realized volatility in the S&P 500, after peaking around 130, has declined to the mid 80s. You’re forgiven for feeling that the market is still volatile — this measure began the year around 7.0.

Risk versus uncertainty
The volatility we’re seeing is less a reflection of risk than of uncertainty. What’s the difference? Risk is measurable (it has a normal statistical distribution). Uncertainty isn’t. For example, one can reasonably understand the risk of known unknowns. We know how investors using volatility to size positions might behave or how oil shocks could potentially impact markets. But COVID-19 is an unknown unknown. We don’t know how the virus might change or evolve, what the health and economic impacts will be, or for how long we’ll have to contend with it. That makes it incredibly challenging to price equities right now. Because of this, we expect volatility to continue for some time, both to the upside and the downside.

Fixed income improves
On the other hand, fixed income market function is improving, showing the efficacy of the extraordinary measures announced by the Fed and other central banks over the past few weeks. Bazooka may be an understatement, as the Fed has purchased $631 billion in U.S. Treasuries since resuming Quantitative Easing (QE) two weeks ago. It plans on purchasing a smaller amount this week than last week, reflecting growing confidence that it has the U.S. bond market more under control.

Yields decline across the curve
Another sign of proper market functioning? Yields declined across the curve last week, with the 2-year Treasury falling 7 basis points (bps) to 0.25% and the 10-year falling 17 bps to 0.68% [Figure 2]. While these seem quite low, it makes sense given the Fed’s commitment to keeping rates lower for longer in order to support growth.  And because of how broken things things were, you can see that when the Fed first announced QE before the open on March 16th, bond yields initially went higher before eventually declining [Figure 2].