IS WALL STREET’S LACK OF FEAR A REASON TO BE FEARFUL?
The lack of anxiety among big, money-management firms comes at a time when the broad U.S. stock market is at all-time highs — despite troubling political headlines out of Washington, geopolitical jitters in places such as North Korea and a stock market that’s overvalued after more than eight years of rising share prices.
VIX takes the temperature of the market’s anxiety level. It shows how much market volatility — Wall Street’s code word for market swings to the downside — that investors expect in the next 30 days.
For now, the fear gauge is sending a “don’t worry, be happy” signal. The current market calm also can be seen in the tiny daily price movements of the Standard & Poor’s 500, an index of 500 large U.S. stocks. Only three times this year has that index been up or down 1% or more, compared with an average of 4.25 times per month since 1950, according to investment research firm CFRA.
Wall Street is focusing mainly on good things for now, such as U.S. corporate earnings, which in the first quarter are on track to grow nearly 15%, the best quarterly pace in more than five years, according to earnings-tracker Thomson Reuters. Other bright spots are the rebound in economic growth, not only in the U.S. but around the globe, and few, if any, telltale signs of a recession or bear market. A dearth of “bad” economic news or examples of “irrational exuberance” from investors is also signaling all clear.
But to say there’s nothing to worry about would be shortsighted. “There’s always stuff that can go wrong, and no doubt something will (eventually) go wrong,” says Ed Keon, managing director at QMA, an asset management firm.
The VIX fear gauge often is viewed as a contrarian signal. So when it’s very low and not waving a warning flag, it could be signaling investor complacency is high and that investors could be caught off guard if the market surprises them with a downturn.
And just because the VIX isn’t warning of tough times for the market doesn’t mean there aren’t reasons to be afraid.
“There’s plenty to fear,” says Doug Ramsey, chief investment officer at The Leuthold Group.
Worries to consider: uStock prices are high. The S&P 500 is trading at nearly 18 times estimated corporate earnings for the next four quarters, or more than 20% above its average long-term valuation, Thomson Reuters says. Ramsey sounds a more alarming tone: “ValuaThe
tions,” he says, “are higher than at any other time other than the 24 months around the tech bubble peak in March 2000.” uOld worries aren’t dead. An economic downturn in China, the world’s secondlargest economy, is still a risk, Keon says. Populism in Europe isn’t dead either, he says, even though French voters recently rejected the nationalist presidential candidate Marine Le Pen in favor of centrist Emmanuel Macron. Geopolitical tensions around the world in places such as North Korea and Russia can also reignite at any time, Keon adds.
uPolitical risk. “Washington remains a wild card,” Terry Sandven, chief equity strategist at US Bank, warned in a report. President Trump’s political troubles tied to his firing of FBI chief James Comey and his campaign’s ties to Russia could get worse, which could dent investor confidence and further delay his market-friendly economic agenda, such as promised tax cuts.
It’s always easy to ignore risks when stocks are rising, but doing so could cause investors financial harm.
“I don’t think investors should ever be complacent,” says Lindsey Bell, investment strategist at CFRA. “Rarely is the event that shakes markets is the one most anticipated.”