Volatility Low as Concerns of a Stock Market Crash Soars
The S&P 500 continues to trade near record levels and market volatility is near record lows despite a raft of indicators suggesting the current bull-market is in jeopardy. Investors have become complacent, stocks are significantly overvalued, and history points to a major stock market correction. The S&P 500 and Nasdaq hit record levels on Monday, May 15 as investors shrugged off weak U.S. economic data and geopolitical tensions. In fact, investors have not been this complacent since 2007, just before the Financial Crisis and Great Recession. Right now, the CBOE Volatility Index (VIX) is at 10.47, slightly above the record-low reading of 9.56 on May 9. Not surprisingly, the S&P 500 is at record levels. Better known as the “fear index” the VIX is a measure of market volatility. The more investors expect the S&P 500 to fluctuate the higher the VIX goes up. The VIX fear index number is a percentage. At 10.47, this means investors expect the S&P 500 to fluctuate in a 10.47% range over the next 30 days. To put that in context, the VIX fear index hit a record high of 89.53 in late October 2008; the same time that the S&P 500 was in freefall. Today, investors believe the underlying foundation of the bull-market, the second longest in history, is rock solid. The gap between investor complacency and the S&P 500 has never been this great. The last time investor complacency was even close to this level was back in July 1998, July 1999, and August 2000. In the months following each of these examples, the stock market experienced a big correction. Investors remain optimistic and continue to push stock valuations to levels not seen since Black Tuesday in 1929. They’re doing this at a time when the U.S. is facing a constitutional crisis, as well as when the U.S. economic data remains weak, there is a slowing Chinese economy, and simmering geopolitical tensions between the U.S. and Russia, North Korea, Iran, and Syria. It is widely expected that the stock market rally will continue, at least until some sort of catalyst derails the optimism. What that will be remains to be unseen, but it will have to be something really major, especially with investors already ignoring the major negative issues staring them in the face. When an unavoidable crack appears, whether from President Trump’s economic policies, continued weak gross domestic product growth, rising geopolitical tensions, or Black Swan events, investors will run for the exits and the S&P 500 and other major indices will experience a well-deserved stock market correction.
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