The CBOE Volatility Index (.VIX), considered the best gauge of fear in the market, slumped to 9.37 last month – its lowest level in more than 24 years. On Tuesday, the index inched slightly higher to 11.22.
Investors are seen positioning for higher volatility, partly in reaction to hawkish signals from several major central banks, the analysts said. However, while the low volatility regime is likely to be tested, a sustained breakout is not forecast to succeed.
“Breaking out of the low volatility regime usually required a large shock, for example, a recession or war. While central bank uncertainty can drive volatility in the near term, it is unlikely to drive a sustained high volatility regime,” they said.
Goldman explained that while periods of low volatility are not necessarily unusual, they tend to emanate from a robust macroeconomic backdrop with strong growth and relatively low inflation and interest rates – similar to a “Goldilocks” scenario. Financial markets have reflected this since the start of the year, they said.
The investment bank estimated the chances of a recession over the next two years at 25 percent.