Fear of Stock Market Dive Creeps Back as Hedging Costs Climb
The S&P 500 Index’s surprise 16% rally this year is rewarding traders who bought in early and punishing those who’ve remained skeptical. But fear of a downturn remains.
Investors can see it in the options market, where hedging against another rout is getting more expensive. Contracts betting on a 10% decline in the SPDR S&P 500 ETF — the largest exchange-traded fund tracking the index, better known by its ticker SPY — cost 1.8 times more than options that profit from a 10% rally, data compiled by Bloomberg show.
Though still shy of the levels seen earlier this year during the banking crisis, it’s a sign that investors are beginning to pay up for protection heading into this week’s crucial reading on US consumer prices due on Wednesday. That will set the stage for stocks leading up to the Federal Reserve’s interest-rate decision on Sept. 20 and Chair Jerome Powell’s subsequent press conference.
“The next big leg of the equity rally won’t come until we get certainty on the direction of rates,” said Scott Ladner, chief investment officer at Horizon Investments.