Goldman Sachs Predicts Increased Volatility in the Stock Market and Offers a Trade Strategy to Capitalize on the Turbulence
Goldman Sachs, a leading financial institution, anticipates a bumpier ride ahead for the stock market and provides recommendations for investors to take advantage of the volatility. In a note written by John Marshall, head of derivatives research at the firm, it is stated that volatility is expected to rise in the coming weeks. Historical data supports this prediction, as October has historically been a turbulent period for markets. Since 1928, the S&P 500 has experienced 25% higher realized volatility in October compared to other months, driven by the pressure on companies to meet year-end expectations during the crucial earnings season.
The choppiness in October has become more pronounced in recent decades, with notable instances in 1997, 2002, 2008, and 2022. Last October, the 1-month implied volatility in the S&P 500 rose from 25 to 30. Marshall believes that this pattern is not a mere coincidence but is influenced by performance pressures on company managements and investors, which exacerbate shifts in investor sentiment during this time of year.
To hedge against the risk of rising volatility, Marshall recommends that investors buy VIX October calls. The CBOE Volatility Index (VIX), a widely used measure of volatility, has experienced a decline of approximately 35% in 2023. However, Goldman Sachs expects a potential upside driven by a deteriorating macroeconomic backdrop and seasonal volatility. The current level of the VIX hovers around 14.
Arun Prakash, a representative of the firm, suggests purchasing CBOE Volatility Index (VIX) Oct monthly expiry $15 calls as a hedge against the potential rise in volatility. The firm's volatility model, based on five economic factors, indicates an average VIX of 20.6 in October, compared to the current level of 13.5, according to economists' forecasts. Additionally, historical trends show that the VIX tends to rise in October due to seasonal factors.
Marshall further advises option buyers to focus on stock names and sectors with fundamental catalysts. This strategic approach can help investors navigate the volatile market conditions and potentially capitalize on market shifts.
In conclusion, Goldman Sachs' analysis points to an anticipated increase in stock market volatility, particularly in October. Investors can consider implementing a trade strategy involving VIX October calls to hedge against rising volatility. By focusing on specific stock names and sectors with fundamental catalysts, investors may position themselves to navigate the market turbulence and potentially benefit from changing investor sentiment.
As Goldman Sachs predicts an increase in stock market volatility, this forecast presents a unique scenario for new businesses. The anticipated turbulence could have a significant impact on the financial planning and investment strategies of these enterprises.
Implications for New Businesses
The predicted volatility could lead to a more challenging investment environment for new businesses. It may require them to be more cautious and strategic in their financial decisions, particularly in terms of investments and capital allocation. The potential for increased volatility could also impact the valuation of new businesses, especially those seeking funding or considering going public.
However, this situation also presents an opportunity for new businesses to demonstrate their resilience and strategic acumen. By focusing on fundamental catalysts within their industry, new businesses can potentially navigate the volatility and even capitalize on market shifts. They can also consider hedging strategies, such as the VIX October calls recommended by Goldman Sachs, to mitigate the risk of rising volatility.
In conclusion, while the predicted increase in stock market volatility may present challenges, it also offers opportunities for new businesses to showcase their strategic prowess and resilience. By adopting a well-thought-out financial strategy and focusing on fundamental catalysts, new businesses can navigate the anticipated turbulence and potentially leverage it to their advantage.