Is it the calm before the storm? Is it the calm before the storm? Is it the calm before the storm?

Is it the calm before the storm?

Equities 5 minutes to read
Peter Garnry

Head of Equity Strategy

Summary:  Downside volatility in US equities has hit the lowest levels since 2018 and with potential headwinds for the economy arriving investors should think about ways to lower their equity portfolio risk. This can be done several ways ranging from options, futures, to that of simply adding bonds to the equity portfolio as bonds will often attract safe haven flows if volatility increases in equities.

Key points in this equity note

  • Downside volatility in S&P 500 has reached levels not seen since 2018. Historically such low levels of volatility are often succeeded by a violent release of volatility triggered by an unpredictable event.

  • With obvious cracks emerging in the economy from higher interest rates and the US fiscal impulse turning from tailwind to headwind it might be a good time to consider lowering the risk in your equity portfolio by either hedging or adding bonds to the portfolio.

Lowest downside volatility in US equities since 2018

The 128-day downside volatility, measuring the standard deviation of negative returns, in the S&P 500 Index has reached its lowest levels since 2018, in fact the period before the market began pricing a potential Fed policy mistake, consistent with recent market observations of low implied equity volatility in US equity options and the return of US technology IPOs (Arm and Instacart). Whenever the equity market reaches these low downside volatility levels it means energy is getting compressed and trends/momentum are amplified to unsustainable levels. Such a period is often followed by a violent release of volatility (energy) triggered by a breakdown in the narratives and trend that were in place as volatility got compressed.

When equity market valuations go new stretched levels, and we see dangerously inflated IPOs such as Arm and Instacart, the US fiscal impulse going from tailwind to headwind, combined with low realized volatility, then it is time for investors to ask whether now is a good starting point for thinking about downside risks.

Mitigating downside risks in an equity portfolio can be done in several ways. One way is to buy put options on benchmark equity indices (expiry in 3-6 months from now) which pays off if equity indices fall below the strike price less the premium paid for protection, short positions in equity futures or CFD (also called delta one hedging because the hedging kicks in immediately), or even more simple adding bonds to the portfolio as any hiccup in equity markets will trigger safe haven flows into bonds.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.