Wednesday 28th February 2018
The calm after one storm – and before the next….
Markets appear to be recovering from the tremor that shook them earlier this month….
The FTSE 100 is 200+ points ahead of its February 9th low….
The FTSE 250 has recovered 700 points over the same period….
In the US, the Dow Jones Index, the S&P 500 and the Nasdaq Composite have each made-up lost ground in similar fashion….
Jangled nerves appear to have settled. Hands have stopped shaking. Heart-rates and blood pressure readings have returned to levels closer to pre-tremor norms….
Market confidence is gradually rediscovering its legs – it is no longer to be found whimpering in the corner, curled up in the fetal position….
The white- knuckle ride has levelled out into something more familiar and much less unsettling. The worst appears to be over….
- VIX reflects renewed sense of well-being….
We see this renewed sense of well-being reflected in the CBOE Volatility Index or VIX chart….
Some people call it the Fear Index. You might also think of it as the Complacency Index….
You might recall that the Index measures how volatile investors expect the market to be across the next 30-day-period.
If the VIX measurement is high, that can be taken as a sign that investors are fearful….
When the VIX measurement is low, that is a signal that the market is complacent….
Complacency had reigned supreme for a long time ahead of events earlier this month….
The reading hit an all-time low in the summer of last year – in other words markets had never been less fearful or more complacent about the prospect of change….
- Just when you least expect it….
In the markets, things that are not expected have a habit of showing up and knocking on the door….
Just when the market begins to believe it has the whole deal figured out, that’s typically the time when events conspire to prove it wrong….
We know exactly the point at which investors began to feel wrong earlier this month….
The VIX suddenly spiked on 5th February. That was the moment when investors felt more scared than they had at any time since 2016….
Volatility and fear were suddenly back in town – like a pair of crazy bandits released early and unexpectedly from prison….
Investors, awoken from their slumbers, were suddenly panicked. They had forgotten what it was like to hear gunshots….
- Guaranteed profits – an illusion….
Many had been lulled into a false sense of security by the recent absence of volatility from the markets….
Complacency – the belief that tomorrow would be no different than today – had grown like a weed….
And it had encouraged some investors to take risks in the market that they might not otherwise have taken….
When a market seems only to go one way (up, up and up again) it encourages the belief that to get out is to miss out – on the next sequence of guaranteed profits….
When market values suddenly lost altitude, it served as a solid reminder that profits are strictly notional – until such time they are banked….
- The calm AFTER the storm….
But all of this – all the turbulence and the harsh lesson – are behind us now. We are watching them recede in the rear-view mirror….
At least that’s what the current reading on the VIX Index tells us….
Investors are not as complacent as they were ahead of this month’s ‘correction’. Not by a long chalk. But fears have certainly subsided….
The VIX reading has fallen significantly since that spike on 5th February – and it continues along a downward trend….
Investors are feeling better about things. The more time that passes, the better it feels. Confidence is growing again. The boat has steadied. Hence the recovery in stock prices….
Right now, it’s like being in an airliner that has successfully negotiated brutal turbulence high above the Atlantic Ocean….
Strangers are smiling at one another. Even talking with one another. Everybody is feeling strangely elated. We’ve all survived to tell the tale – and if the pilot were to put this thing on the ground right now, we’d probably burst into a spontaneous round of applause….
But these sentiments soon pass. They are soon forgotten as life gets back to ‘normal’….
Give it another half an hour and we’ll be wondering where the damn stewardess has got to with the drinks trolley. And we’ll be cursing the guy next door to us because his elbow is intruding across the arm rest and into our space….
The danger we experienced and the fear we felt is swiftly forgotten. We get back to the business of life and living it as well as we can….
Nobody is thinking that the turbulence we just left behind is as nothing compared to the turbulence – yet unknown – that lies directly ahead, and which cannot be avoided….
- Coming soon – Sunday morning….
Events in global markets last month were a beginning of something – not an end….
All we felt was a tremor – a warning of bigger quakes and shakes ahead….
A decade of all-time-low interest rates and quantitative easing (money-printing or, more accurately, bond-buying) has done little to increase GDP or to raise productivity levels….
But that loose monetary policy did fuel rampant speculation in the stock markets….
For a decade, investors couldn’t lose. You could borrow cheap and earn big in global stock markets that just kept going up….
It’s been the party that out-stripped all other parties. The drink flowed. The music played. Everybody’s danced his socks off until dawn….
But every party must end eventually. For every Saturday night, there is always a Sunday morning that follows. And a hangover to deal with….
Sunday hasn’t dawned yet. But it will. And when it does, events experienced in the global earlier this month will seem tame by comparison….
More to come on why this is so….
That’s how it looks from here….
All the best,