Boo! The market is a new American Horror Story
Volatility is back. Even though the markets were rallying on Thursday, the Dow and S&P 500 are still down nearly 2% in the past week. Investors have started to worry (again) about a possible rate hike from the Federal Reserve and a renewed slide in oil prices.
The widely watched volatility gauge known as the VIX has shot up 40% in the past few days too.
And that’s a big reason why CNNMoney’s Fear & Greed Index, which looks at the VIX and six other measures of market sentiment, is now showing signs of Fear. Just a week ago, the index was in Greed territory. A month ago, it was in Extreme Greed mode.
It’s been a sudden — but also strange — shift in momentum.
The Fear & Greed index still shows there is strong demand for junk bonds, which is usually a sign of Extreme Greed. But investors have also flocked to safe haven Treasury bonds lately, an indication of Extreme Fear.
The huge spike in the VIX is also a big warning sign that indicates Extreme Fear. The four remaining indicators in the Fear & Greed Index, which look at various indicators of stock and options activity, are in Fear mode.
This could be the beginning of a new period of market turmoil that could last as long as investors continue to obsess about the timing of the next Fed rate hike.
The U.S. presidential election could add to the jitters. With Donald Trump gaining momentum once again, expect more volatility.
Trump, despite being the Republican candidate, is viewed as far less friendly to Wall Street than Hillary Clinton thanks to controversial comments about global trade, his love affair with debt and his disdain for the Federal Reserve.
Experts don’t seem overly worried about the recent bout of volatility though. After all, we’ve been here before. The market had a mini freakout earlier this year due to worries about China. And then again in the wake of Brexit.
Keith Springer, who runs the investment firm Springer Financial Advisors, said that central bank stimulus around the globe isn’t going away anytime soon. He quipped that low rates will be like Viagra that keep stocks — uhh — up for the foreseeable future.
“All of this rhetoric is nothing but threats to keep stocks from soaring on the back of continued stimulus. In the end, I doubt the Fed will raise rates in September, or the rest of the year,” Springer wrote in a note to clients.
“I expect more volatility and a little more decline in stocks in advance of the Fed meeting next week, followed by new highs when they don’t increase rates,” he added.
Lance Humphrey, a portfolio manager at USAA Investments, also thinks that the current bout of fear may be short-lived.
“The U.S. stock market in 2016 has been a story of long stretches of calm weather punctuated by the occasional tempest. Right now, it’s a bit stormy out there,” he said in a report to clients. “What all of these past events have in common is their transience.”
Humphrey added that investors have been rewarded handsomely if they bought following the numerous dips that have taken place since the current bull market began in March 2009.
Still, volatility may be here to stay.
Humphrey had a laundry list of concerns besides the Fed that could keep investors up at night: “Rich stock valuations, declining revenues and profits, soft global economic growth, the increasingly contentious presidential election and more.”
So the sleepy summer for stocks is over. The sense of complacency that quickly set in after the Brexit vote briefly rocked markets could be a thing of the past as well. Is it any wonder that investors are scared $hitle$$ once more?