Volatility has declined again. Are investors too complacent?
Several of the drivers behind the long-running bull market and economic recovery are evolving.
August 10, 2018 | 1 minute read
This week the CBOE Volatility Index (VIX), which measures investor expectations of near-term volatility, fell below 11 once again.1 It reached its lowest point since January and flirted with its historically low range of 2017.1
The VIX spiked in late January as investors feared that a rapid rise in interest rates might derail the long-running bull market. Since then, however, the VIX has been on a gradual downtrend, as the chart highlights. Today, bullish investors far outnumber the bearish.2
However, as investors have become gradually more complacent about market volatility, several of the drivers behind the long-running bull market and economic recovery – accommodative central bank policy, low Treasury yields, limited volatility and strong economic tailwinds among them – appear to be evolving.
Q2 U.S. GDP reached a near four-year high of 4.1%, yet many forecasts expect this will be a peak in the current economic cycle.3 Similarly, Fed funds futures indicate an approximately 65% chance that the Fed will raise rates another two times in the balance of the year.4
Indeed, U.S. economic conditions remain strong, as the Fed noted at its August meeting.5 Yet, we have seen this year that volatility can spike quickly and without notice, and slowing economic or market conditions have the potential to intensify it. Given today’s environment, it may be wise for investors to proactively prepare for further volatility before it arrives.