In recent weeks, there has been a growing disconnect between single-stock volatility and credit markets, which have been pricing serious stress, while index volatility has remained relatively stable. According to Garrett, this disconnect is finally starting to close as macro equity volatility catches up with the panic underneath. However, the question remains whether this is just the beginning of a more significant increase in volatility.

The reason for this disconnect is rooted in the different ways that volatility is measured. Single-stock volatility, which is measured by the standard deviation of stock prices, is more closely tied to the underlying fundamentals of a company, such as its financial health and industry trends. Credit markets, on the other hand, are more focused on the overall health of the economy and the impact of macroeconomic factors on credit risk. As a result, credit markets have been pricing in more stress than index volatility, which is influenced by a broader range of factors, including monetary policy and geopolitical events.

However, as Garrett points out, this disconnect is finally starting to close. As macro equity volatility catches up with the panic underneath, we may see a more significant increase in volatility across the board. This could have important implications for investors, who may need to reassess their risk exposure and consider hedging strategies to protect their portfolios.

It’s worth noting that this disconnect is not unprecedented. In the past, there have been instances where single-stock volatility and credit markets have priced in more stress than index volatility, only to see the disconnect narrow later on. However, the current situation is unique in that it comes at a time when the global economy is facing a number of challenges, including the COVID-19 pandemic, trade tensions, and political instability. As a result, it’s possible that this disconnect could persist for longer than in previous periods, and investors may need to be prepared for a more volatile market environment.