Can December Deliver Market Cheer?

Andrew Wilkinson of Interactive Brokers sits down with Kevin Davitt from Nasdaq to unpack whether December can deliver the market cheer investors hope for. From volatility swings to carry trade risks and crypto surprises, this episode dives deep into what could shape the year-end rally.

Summary – IBKR Podcasts Ep. 327

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this Week’s Market Minute with me, Andrew Wilkinson, at Interactive Brokers. My guest today is Kevin Davitt, Head of Index Options Content at Nasdaq. Kevin, welcome back to the program. 

Kevin Davitt

Andrew, thank you for having me back. I’m looking forward to it. 

Andrew Wilkinson

Well, today’s date is December 3rd, so we’re into the final month of the year. November was a negative month for technology names, Kevin—just unable to reverse a loss of risk appetite. But following signs of consumer spending on Black Friday and Cyber Monday, the NASDAQ Composite Index is leading market gains. 

Would you say—is it too early to say that stocks are safe into year-end, in your opinion? 

Kevin Davitt

A big part of me wants to say yes because I’ve been around long enough to know the general tendency toward the end of the year and positive flows. So my general inclination is yes. We typically see strong performance in December, especially going into December with a strongly positive year, which is the case. You mentioned the NASDAQ Composite. I focus a little bit more attention where more assets are—in the NASDAQ 100—that has outpaced the S&P by about 400 basis points again coming into December. So, almost 22% versus up 18%. This is likely to be, barring some unforeseen month, the 14th out of the last 18 years where the NASDAQ 100 outperforms. 

Now, I want to be fair—and maybe it’s the attorney in me or just sort of an options thinker—that we still have concerns. Whether you want to look at the Japanese bond market, your colleague Steve Sosnick focused on the carry trade and potentially more hikes in Japan earlier this week in a really good piece. If the audience hasn’t read it, if we get another unwind, that could be hairy. We still have Broadcom earnings, delayed unemployment data, and another Fed decision, which isn’t necessarily a foregone conclusion. Plus, you have the potential for headline risk. That’s not really been a concern for months, but it’s something that’s always in the back of my mind. 

So that is a back-and-forth answer. If I needed to put it in musical terms—Is it too early to say that stocks are safe into year-end? It would be an Oasis answer: Definitely Maybe. 

Andrew Wilkinson

Very nice. 2025 has been—the path of volatility has been all over the place. Are there key takeaways from that path of volatility for investors, do you think? 

Kevin Davitt

Man, the path of volatility, whether we’re talking realized or implied this year, has been interesting. But then when I step back, in many ways, as a measure of volatility, it kind of always is interesting—at least to the audience and the circles that we run in. And those are increasingly broad in terms of investors that are following what’s up with the market and following the velocity with which underlyings move. 

If I think broadly about the market: We saw short-term volatility measures that were in single digits early in the year, up near 80 in April around Tarris—80 is exceptionally high for a broad-based index—and then it was back around six in late July. I’m talking about NASDAQ 100 short-term, so like 10-day realized volatility. We’ve had a bit of everything. Now, longer-dated realized or implied V levels are going to be slightly more muted because it’s a longer window, but we’ve moved from relatively low levels to historically high levels and back again. Thinking through the lens of a trader, I would argue that this year has been pretty opportunistic from both the long and the short side—so like tactical types. 

And those that actively monetized hedges likely outperformed. V moved up and came in with similar velocities, which over a long timeframe is somewhat unusual—particularly on the decline in vol. Typically, it comes in a little more stair-step. But my expectation and thinking is that markets are now repricing risk more quickly than ever before. My belief is that that’s here to stay, and it happens both ways—on the upside for volatility as well as on the downside. 

So I do believe that monetization—having a plan if you are long or short volatility in general—really, really benefits the end user. 

Andrew Wilkinson

Kevin, I wanted to pick your brains on crypto. Though it’s been an unusual bellwether this year, and risk appetite very recently has been unusually down. Any thoughts from you on the intersection of crypto and equity risk heading into year-end? 

Kevin Davitt

You make a very good point, particularly of late, and I’ll speak personally. I’ve followed crypto as you sort of framed it—as a risk appetite proxy—for many years. It has been fascinating more recently to see how derivative markets around crypto have matured. 

You look at the shift in the growth in assets in some of the biggest ETFs around this market—it has been huge. Some of the average daily volume numbers in the leading option-based products there are in the top 10 on many days this year. 

And for whatever it’s worth, it’s the first year I have personally allocated capital to a crypto product with embedded optionality. I’m not advocating for that, but the market has evolved. I think it’s exciting. I think that will continue into next year, and I think that’s generally a good thing for market participants. Now, what you alluded to in the short term has been a weakening of the correlation between broad-based equity markets like the NASDAQ 100 and Bitcoin. So if you look at measures like a rolling one-year correlation between the NASDAQ 100 and Bitcoin prices, it’s been as high as nearly 0.90—very, very positive correlation—but it’s weakened significantly of late. It’s closer to 0.6 around now. Still meaningfully positive, but a meaningful divergence as well. 

So my last point is this: Imagine it was late last year and I told you, Andrew, that silver would be up like 90% this year, gold was going to be up 55%, and they’re both making all-time highs. Your assumption would probably be that Bitcoin was performing exceptionally well. As of this morning, Bitcoin is flat year-to-date and one of the worst performers in a group of risk assets. 

So the takeaway there is markets are amazing, and they’re not going to do always what you expect—and it’s a good reminder of that. 

Andrew Wilkinson

I want to take you back to something you mentioned earlier about the Sosnick article on Japanese yields, and readers can find that at the Interactive Brokers Campus under Traders’ Insight. About 15–16 months ago, in August 2024, the Japanese yen strengthened and caused the abandonment of the so-called carry trade—where you sell yen and fund other investments. The result? Stock markets saw more selling of the yen, which caused more selling of stocks, and it just becomes this vicious cycle. When does this stop? The Bank of Japan this week seems to be signaling another interest rate increase—perhaps coming very soon, but nicely floated by them. Is that another potential negative looming on the horizon, do you think? 

Kevin Davitt

Yeah, so on that point, I think the way you framed it in terms of why this matters and the mechanics of it was excellent. I write a NASDAQ internal piece every weekend, and the focus is on the broad market over the last handful of days through the lens of options and volatility markets. Of late, I have focused a fair bit of attention on the Japanese interest rate market. JGBs have been making significant moves, and yields are at the high end of a 25-year range now. For context, keep in mind that 10-year yields in Japan went negative in 2016 and 2019. 

That carry trade you outlined, Andrew—where sophisticated investors borrow in yen and invest in higher-yielding debt to realize that spread, maybe offset some of it with currency swaps—is considered very significant globally. There are estimates about the size of that trade, and it’s huge. You alluded to a bump or an unwind in some fairly ugly way in August 2024. If the audience remembers, that was a morning where much of the selling cascaded before the U.S. cash open during Asian and European hours. That was a day when the VIX briefly measured 65. So, to your original point, I would say that risk still does exist, and it’s something I keep my eye on. I think, again, you could see a situation where opportunistic hedging—having a plan around monetizing it—could be an excellent opportunity. I’m not saying it’s necessarily likely. The Bank of Japan has signaled its intent to raise rates. We’ll see what that shakes out, particularly if the U.S. then cuts rates again and what impact that has on the carry trade. Good question and something to focus on. 

Andrew Wilkinson

Kevin Davitt, Head of Index Options Content at Nasdaq—thanks again for joining me. 

Kevin Davitt

My pleasure. 

Andrew Wilkinson

And to the audience: If you enjoyed today’s episode, please remember to subscribe wherever you download your podcasts. Bye for now.