Why The Calmest Markets In 50 Years?

Within the world of finances, markets and economics, there is a widely watched indicator called the VIX. Without getting into a deep, boring description, the VIX basically is a measurement of market volatility. While a highly volatile market environment, with quick swings between sharp highs and lows throughout a day, week or month would have a high VIX, calmer markets that are stable and lack big swings have a lower VIX.

 You might think, with all the political strife and global instability, the markets might follow suit and respond with similar volatility. You would be wrong. In fact, the VIX indicates that market volatility over the past 6 months has been some of the lowest we have experienced in the past half century.  And indications that project future volatility predict a VIX that is likely to stay below historical averages both one month into the future and five years ahead.  Why is this?  There are a lot of theories, but if figuring out the market was easy, well, we’d all be a bit wealthier.  But it never hurts to try, right?

Employment.  With unemployment numbers at levels not seen since before the recession 10 years ago and wages increasing, we have a market that is more diluted with a broader base of investors. When people get jobs and save money, more of them look to invest in the markets. When that happens, the market is like a bigger ship.  Getting it to turn in any direction just takes more time, thus there is less volatility in the markets.

Fatigue. It wouldn’t be difficult to make the case that people have just become immune and have started to ignore the ridiculous rhetoric and tone set by the political class and the instability we see around the globe. Maybe people have just started to ignore the chaos and live their own lives.

Gridlock. Similar to fatigue, it’s possible people view the current political environment and don’t see how anything significant could possibly get done that would have a big impact on the economy. No big changes means predictability and stability – causing an environment where even the most cautious of investors feel safe.

Stability means it’s a lot easier to make predictions. If things remain relatively calm, we can expect the markets to continue on their sustainable growth pattern, the Fed to keep to their plans to bump interest rates a couple more times between now and the end of the year,  inflation to remain in check, and the cost of money (mortgages, auto loans, etc) to slowly creep up. 

Of course, all of that could change. That’s what makes the financial world interesting.

Sources:

http://www.cnbc.com/2017/06/19/in-calm-markets-focus-on-maximizing-returns-not-minimizing-volatilty.html

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