The Market’s Feeling Fearless, And It Could Stay That Way

The Market’s Feeling Fearless, And It Could Stay That Way
Paul Allison, CFA

7 months ago1 min

Mentioned in story

The VIX, commonly known as the market’s “fear gauge”, measures volatility in the stock market. When it’s low, it signals all is calm, and when it spikes, it’s often because of some event-driven panic. Right now it’s low and that’s raised some alarms, the theory being that as night follows day, the sun will set on these calm days and a panic will rise.

Now, there’s nothing wrong with that theory; it’s factually true, at the end of the day. But I’d offer one caveat: the calm can last for a long, long time.

This chart shows how long the VIX (blue line) can stay at low levels. It shows something else too: check out the places where the S&P 500 (gray line) turns red. The red highlights the periods after the VIX dipped below 14 – around where it is today. During the early-to-mid 1990s, the S&P shot up more than 100%; in the mid-to-late 2000s, it gained more than 30%; and in the latter part of the last decade, it rose more than 130% – all periods of lasting low volatility.

So, sure, it’s important to keep your antenna up for risks, but you don’t necessarily have to fear a lack of fear. In fact, it could be worth embracing it. These warm and fuzzy calm days could go on for a lot longer than you might think.

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