Richard Thaler has been doing the media circuit since being announced as the winner of this year’s Sveriges Riksbank Prize in memory of Alfred Nobel (which we all know as the Nobel Prize in Economics). I heard him reiterate something he said at the CFA Conference in Philadelphia about market volatility. Basically, he’s surprised stock market volatility is low as well as perplexed by the low level of VIX. My thought is, “Why wouldn’t stock market volatility and VIX be low?”
From the macro side things are pretty much fine. We are embarking on earnings season with expectations of continued growth. Inflation is under control. The market is pricing in and expecting a 25 bp rate hike in December. But, really, what is the difference between a target of 100 – 125 bp and 125 to 150 bp (I know, 25 bp, but in a macro sense does it change behaviors). The government is not doing too much other than battling on social media. I personally think this is good for the markets as there is no legislative risk to business conditions. The only thing that may get done is tax reform and the recent rally in the Russell 2000 indicates the market likes that.
Also, think about this from a behavioral point of view. Every opportunity to buy stocks on weakness in about a decade has been rewarded with profits. For the volatility players, every chance to sell a volatility spike has worked as well. The stock drops have been met with quicker buying and the volatility spikes are now measured in hours and not days.
I’m not saying this will last and those of us that have been around to experience 1987, 2000, 2008 and some other tumultuous market events know the current conditions will not last. We also are smart enough to avoid predicting the next sustained volatility event (my polite term for a market sell off). However, looking around I can see why the market is so complacent. This doesn’t mean I agree with it, just that I understand it.