Boring markets won't last forever

Wall Street's fear gauge hovers near a five-year low but it may be discounting 2 key risks.

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An interesting but unsurprising tidbit: American executives’ pay is increasing at the fastest rate in 14 years, according to a new study from ISS Corporate.

Remember, it was only a few days ago Tesla’s Elon Musk secured a pay package in the $50 billion range.

In today’s edition, we’re covering Wall Street’s fear gauge, global rate cut decisions, and pension funds’ losing bet.

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Investors aren’t expecting pain to hit stocks anytime soon

At least that’s what Wall Street’s so-called fear gauge is telling us. 

The CBOE Volatility Index (VIX) dropped under 12 last week — almost a five-year low — which suggests traders expect calm days ahead for equities. 

The VIX tracks options prices, which imply how much investors are hedging against risks.

Since the start of 2023 it’s remained below 20, mirroring investors’ optimism coming out of the prior year’s bear market.

And what’s not to like these days?

Between a resilient economy, upbeat earnings, AI-fueled enthusiasm, and the Fed’s insistence that rate hikes aren’t happening, investors have plenty to celebrate. 

Plus, the VIX typically spikes when valuations get too frothy and the market is close to a top. That hasn’t happened yet — even as the S&P 500 has notched 29 record highs this year on its way to a 14.5% gain. 

That ascent has been unusually mellow, too. The S&P 500 hasn’t seen a 2% dip in more than 300 trading sessions. 

Some analysts have pointed to mild VIX readings as a sign traders are getting complacent. A stronger-than-expected economy may be luring investors into riskier bets and habits. 

This line of thinking suggests that the potential for outsized returns has made hedging less of a priority, hence a tepid fear gauge.

History suggests otherwise, according to the cofounders of DataTrek Research, Nicholas Colas and Jessica Rabe.

They believe today’s low VIX readings look “entirely consistent” with every multi-year bull market of the last three decades. 

“This is how markets behave when economic growth is reasonably good, Fed policy is at least somewhat predictable, and there is no obvious geopolitical or financial crisis brewing,” Colas and Rabe noted. 

That said, it’s worth pointing out two cautionary details about the current market.

First, the stock rally has been undeniably narrow. Led by Nvidia, the 10 biggest stocks in the S&P 500 now make up over 36% of the index’s entire value, the most in over two decades, according to FactSet. 

While the VIX may not reflect the risk, if one or several of those household names collapses, the whole market could pay the price. 

Second, what happens when “bad” economic data stops being jet fuel for stocks? 

So far, any sign of a cooling economy has inspired more optimism among investors, given that soft data supports the Fed’s case for rate cuts.

But it’s reasonable to expect this pattern to end at some point

Tom Essaye, the founder of Sevens Report Research, wrote in a Friday note that he has noticed signs that this narrative is already shifting at the margins. 

“Twice before I’ve seen investors root for bad economic data to cause the Fed to cut, and both times it hasn’t ended well over a medium-term basis,” Essaye said.

“I hope this time is different, but so far it appears much the same.”

How closely do you watch the VIX, and does it impact your investment decisions? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Market data as of Sunday, 5 p.m. ET


✂️Global cut decisions loom this week. Central banks around the world including those in Australia, the UK, Norway, and Switzerland are expected to signal they won’t easy monetary policy this week. Economists say policymakers in those countries will take a similar stance as the Fed in saying inflation hasn’t yet cooled enough. (Bloomberg)

🏢Delaware lost big against Tesla. The EV company is leaving the state to reincorporate in Texas, a move that other companies could soon follow. About two-thirds of S&P 500 companies are incorporated in Delaware, but some experts have raised concerns that Delaware’s shareholder protections have gone too far. (WSJ)

💰️Pensions are getting burned in private equity. US companies and states handed control over retirement accounts for the promise of high returns, but that money is drying up. Now, investment managers have to figure out how to dole out workers’ savings by unloading positions on the cheap or borrowing. (WSJ)


  • Evercore ISI has raised its S&P 500 year-end forecast to 6,000, the highest among major equity research firms (Bloomberg)

  • China’s residential mortgage-backed securities market has shrunk by nearly two-thirds over the last year (FT)

  • Wells Fargo is losing big money on its flashy rent credit card (WSJ)

  • Bernstein forecasts bitcoin will hit $500,000 by the end of this decade thanks to ETF demand (Business Insider)

  • “Inside Out 2” hit $155 million in its domestic box office debut, the second-highest animation open ever (CNBC)

Last thing:

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