Why investors are ignoring warnings about stocks
Billionaire investor Carl Icahn says the stock market – which posted its ninth record high of 2016 on Thursday – is a “mirage.” Influential bond investor Jeff Gundlach of Doubleline Capital says: “Sell everything.” Bill Gross, the current Janus fixed-income fund manager that once ran the world’s biggest bond fund at PIMCO, recently wrote: “I don’t like bonds. I don’t like most stocks.”
Despite the warnings from high-profile investors – often dubbed the smart money – fear is nowhere in sight on Wall Street, according to a closely watched Wall Street “fear gauge” that tumbled last week to a fresh 52-week low and not far from record-low fear levels in December 1993.
As fear was retreating, the U.S. stock market was climbing to an all-time high, with the Standard & Poor’s 500 stock index, Dow Jones industrial average and Nasdaq all registering record highs Thursday, the first time that’s happened since 1999.
On Aug. 9, the CBOE Volatility Index, or fear gauge better known as the VIX, fell as low as 11.02, not far from its intraday record low of 8.89 back on Dec. 27, 1993, according to CBOE data.
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A low VIX (a measure of how much market volatility investors are expecting) signals that investors expect the market to remain calm. Low fear levels most often occur at times of rising stock prices and tranquil markets. But low VIX readings are often viewed as a sign of investor complacency as risks build.
“The VIX is extremely low, but at the same time there are a lot of things on the negative side of the ledger that people should be concerned about, (but they don't) seem to be focused on,” says Greg Rutherford, CEO and co-founder of Cavalier Investments. "The only thing we have to fear is the lack of fear."
Rutherford ticks off a list of worries that could challenge the market’s current calm.
“(Price-to-earnings ratios) are extremely high,” he says. “GDP is weak. Corporate earnings have contracted four straight quarters. The world economy isn’t great. There’s downward pressure on oil prices again. And central banks continue to drop interest rates (due to weak growth).”
So why isn’t the market listening to the warnings?
The market “doesn't see an event on the horizon that could cause the VIX (or fear) to spike,” says John Canally, chief economic strategist at LPL Financial.
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But that benign state of affairs can change quickly, he adds, if something hits “completely out of the blue,” like last August when China surprised investors by devaluing its currency, the yuan. That shock caused the VIX to jump from an intraday low of 10.88 on Aug. 5, 2015, to 53.29 on Aug. 24. The S&P fell nearly 10% during that period.
VIX spikes are often associated with stock market drops. The S&P 500 also fell 9% earlier in January when the VIX jumped more than 50% in a 12-session span.
A VIX reading above 40 suggests “scary” times for stocks and anything under 20 occurs in benign market environments, says Paul Hickey, co-founder of Bespoke Investment Group.
The VIX hit an intraday peak of 89.53 on Oct. 24, 2008, at the height of the financial crisis, the CBOE says.
While a low VIX can smack of investors turning a blind eye to risk, Bespoke data show that following the 10 other times since 1990 that the VIX fell below 12 after not doing so for three months, stocks were 2.9% higher three months later.
Despite fears of a spike investor fear levels, the VIX could stay low for an extended period, if the stock market continues to grind higher into 2017, says Mark Arbeter, president of Arbeter Investments.
“Fear is low,” says Arbeter, “because stock market price action has been very calm."