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Data Strategies to Prepare Portfolios for Volatility

Companies and Markets

By Christine Short  |  September 27, 2023

It’s that time of year. The kids are back in school, the summer heat has given way to cool breezes, pumpkin spice is out in full force, and traders are on guard for volatility. Historically, the mid-September through October stretch is prime time for big stock swings, including some of the sharpest historical declines in global equities. Investors closely watch this period on the calendar, and, for traders, identifying the possible catalysts for volatility is the first step to staying ahead of it. 

Preparing Portfolios for Volatility

Preservation of capital is often paramount this time of year versus portfolio appreciation. At the same time, though, some of the most bullish moves happen over the final two months of the year, so successfully venturing through the tail end of Q3 and the start of Q4 commonly requires being more nimble than at other times.

A Humbling Year

2023 has fooled many investors. Take yourself back to December last year. Market participants were on edge as fears of a recession were front and center. Wall Street strategists were as bearish as ever, with the average sell-side S&P 500 forecaster expecting a negative return for large-cap US equities. The pessimism made some sense given that interest rates had surged in 2022 - last year was indeed the worst annual return on record for the aggregate bond index. Inflation remained high, auguring further Fed rate hikes, while geopolitical jitters remained.

AI Mania Boosts Big Caps

Another risk was just under the surface, but it was a risk to the upside. Investors were simply caught offside and too bearish on mega-cap tech stocks. You see, a little open-sourced artificial intelligence platform was just beginning to gain legs. ChatGPT was released in November 2022, fueling a boom that few saw coming. Jump ahead to today, and anything AI-related seems to be the darling of investors’ eyes. Corporate events focused on AI are giddy with enthusiasm and suddenly chipmaker Nvidia (NVDA) is the world’s fifth-largest publicly traded company.

Is the VIX Too Low?

More broadly, the Nasdaq Composite is up more than 40% on the year. The concentration of gains has resulted in the S&P 500 rallying less than 20% while an equal-weighted version of the Russell 1000 index sports just a modest return. The strong gains through early September, focused on a handful of glamour stocks, along with a spike in options trading volume (and speculation) has some investors nervous that a volatility event could be on the horizon, akin to what was seen in 1987. Who knows if that will play out, but it all feels a bit too quiet, doesn’t it? The VIX is near its softest levels since January 2020 all while the Treasury market sees wild rate swings. 

Yet while volatility expectations remain low, corporate uncertainty is increasing. The Wall Street Horizon proprietary Late Earnings Report Index (LERI) tracks earnings date changes among publicly traded companies, which can often serve as clues about their financial health. The LERI has a baseline reading of 100, anything above that indicates companies are feeling uncertain about their current and short-term prospects. A LERI reading under 100 suggests companies feel they have a pretty good crystal ball for the near-term. For the Q2 2023 earnings season the LERI stood at 126, the highest reading in a year, and second highest since the COVID-19 pandemic, possibly indicating CEOs are feeling a bit uneasy about present economic conditions. 

Rate Volatility Remains Elevated

The MOVE Index, a gauge of volatility across the Treasury curve, hasn’t budged from extreme levels above 100. Unease regarding how the Fed will cap off its rate-hike cycle casts an ominous shadow over the market. To its credit, the FOMC appears to have done a good job of piloting the economy from four-decade-high inflation and slow growth (see: mid-2022) to what appears to be accelerating growth and lower inflation. The current Core PCE rate of 4.24% and robust Q3 real GDP projections are reasons for hope of a goldilocks soft landing. 

Stock-Bond Correlations Still High Amid a “Good News Is Bad News” Market

The risk is that bringing the rate of personal consumption and inflation closer to 2% will be a tough ask. The result is not just a “higher for longer” interest rate regime, but a “high for really long” reality. That may be bad news for stocks since loftier interest rates might mean lower company valuations. So, the age-old battle between economic growth and tighter monetary policy may wage on into Q4 and beyond. Be sure to hear expert views on whether inflation or the level of interest rates is the primary concern going forward.

Other topics on the docket include what surging options volume might portend for markets, opportunities and threats from the alt data market, and AI tool use cases. 

Hope For the REITs?

We’ll leave you with this company-specific nugget that might have bigger implications. Our team of analysts identified unusual activity in Kimco Realty Corporation (KIM). As of September 2, the $12 billion market cap Retail REITs industry company within the Real Estate sector had yet to confirm its Q3 earnings date slated for October 26 BMO (it normally confirms on August 23). While this would normally be a red flag, perhaps indicating bearish news or firm-specific issues, Kimco is actually getting into the M&A game. 

It announced intentions to acquire RPT Realty in a $2 billion all-stock deal in late August. Amid a consumer that could face headwinds via a slowing jobs market and student loan repayments starting back up, there’s a lot to unpack on this front. We will keep this one on our radar.

The Bottom Line

On September 14, Wall Street Horizon hosted Data Minds: Proactive Strategies for Navigating Market Uncertainty.  View the replay and hear expert guests identify and detail market-moving catalysts ahead of the most historically volatile weeks for stocks. We talked about macro conditions along with data-specific topics, focused on risk management for traders and investors.


This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Christine Short

Vice President of Research, Wall Street Horizon

Ms. Christine Short is Vice President of Research at Wall Street Horizon. In this role, she is focused on publishing research on Wall Street Horizon event data covering 10,000 global equities in the marketplace. Her research has been widely featured in financial news outlets including regular appearances on networks such as CNBC and Fox Business to talk about corporate earnings and the economy. Ms. Short earned a BA in International Relations and English from Fairfield University.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.