Investor fear hits lowest ebb in almost 25 years

May 17, 2017

Keywords: Risk Management

The Dow Jones Industrial Average, Nasdaq Composite and Standard & Poor's 500 have all hit highs in 2017, the likes of which have never been seen before. So it may come as no surprise that investors' fear of a looming bear market are at their lowest levels in almost 25 years, according to recent data.

During the first week of May, the CBOE Volatility Index hit a low that hasn't been witnessed since 1993, the same year in which the VIX was introduced. The measure reached 9.77 on May 8, a bottom that last occurred in Dec 1993, The Wall Street Journal reported.

The dip last witnessed a quarter of century ago follows a litany of achievements for the stock market, all occurring in 2017. For example, the Dow Jones topped 21,000 for the first time in its history during late January, the Nasdaq topped 6,000 earlier this spring - and has yet to retreat below this threshold - and the S&P 500 has closed at new highs fairly consistently.

Should investors fear the lack of fear?
But it's this worry-free mentality that has some investors, economists and financial experts raising the alarm. Kevin Walsh, former governor of the Federal Reserve, indicated as much at a recent investment conference in New York City.

"I would not take comfort; I would take fear," Walsh warned, according to the Journal, alluding specifically to the VIX index.

Generally speaking, the VIX moves in the opposite direction of the stock market, meaning that when stocks gain, the VIX retreats and vice versa. In November 2008, during the height of the financial crisis that eventually led to the Great Recession, the VIX reached a record high of 80.86, The Wall Street Journal reported. It's the consistency of this inverse relationship that's made it a reliable indicator for investors on Wall Street. Indeed, the VIX and S&P 500 have moved in diametrically opposing directions 80 percent of the time since the index's creation, according to the American Association of Individual Investors.

Neutral sentiment higher than historical average
In the short-term, investors seem to believe there won't be any major market movements. Indeed, in the most recent AAII Sentiment Survey, slightly more than 37 percent of respondents expect stock prices to stay the same over the next six months. That's higher than the historical average and a larger percentage than those who think prices will rise or fall during the same span, at 32 percent and 30 percent, respectively.

It's the long term, however, that may be a different story. For instance, the last time the VIX fell below 10, in December 1993, the S&P plummeted 10 percent a few months later, the Journal reported. Additionally, the subprime mortgage crisis followed a low VIX reading back in 2008.

There's no denying that investing carries with it some level of risk. The key to successful investing is risk management. This is precisely what Miles Capital specializes in, as we thrive in providing our clients with the scenario analysis they need to make the best decisions for their financial futures.

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