The VIX index (or 'Fear Index') fell within just 0.39 percentage points of an all-time low yesterday, which suggests that the markets are feeling more certain about the future than at any time for many year. Or are the markets suffering from too much complacency?
By Michael Baxter, economics commentator for The Share Centre
At one point yesterday, the VIX index fell to just 9.56, against an all-time low of 9.17 set on December 23rd 1993.
The index indeed closed at 9.56. To put that in context, the all-time closing price low is 9.31 which happened on December 22nd 1993, and there have only been eight occasions when the index closed below 10 – December 22nd, 23rd, 24th and 28th 1993, 28th January 1994, 21st November 2006 and 8th and 9th May 2017.
Since the index was launched in 1990, the average reading has been 19.5. The index peaked in 2008 with a reading, at close, of 80.06, and closed at 42.99 on 10th August 2011. However, over the last 12 months or so, volatility has been low, with mild exceptions during the EU referendum and US election. The index closed at 25.76 on June 24th last year – a 12 month high and also rose over 22 for 24 hours or so a few days before the UK election.
The index, which is taken from a moving average of the S&P 500, is often referred to as the fear index – implying that right now the markets are very unafraid.
Are they however, too complacent? While it is true that the global economy seems to be in reasonable shape at the moment, with recent purchasing managers’ indexes showing signs of promise, it may be stretching the truth to say there is minimal uncertainty.
The political instability in the Korean Peninsula is testament to that. High levels of household debt to GDP across much of the developed world, surging debt in China, and worrying levels of US student loan debt all illustrate how there are plenty of issues that could blow up, creating a new crisis.
It is often said that markets turn at the moment when all but the most contrarian of investors are on the verge of giving up – a bull market turns sour just at the moment when most bears have been converted to holding more optimistic views.
Recall, that while the index fell below 10 in 2006, less than two years later the global economy suffered its worst financial crisis in 80 years. Just because the VIX is low, it does not mean that all is well, but then neither does it automatically mean crisis is around the corner.
It is possible however, that low interest rates worldwide have distorted the markets.