Markets show no fear, should we be trembling?

As worldwide markets reach record levels, and techs show recovery, it seems there is little to fear...

Article updated: 5 July 2019 12:00pm Author: Michael Baxter

The S&P 500 is at a new all time high, the FTSE 100 is close to a record, the giant techs have mostly recovered from last year’s wobble, but another index shows that investors seem perfectly relaxed about it all. Fear has been banished.

One of my favourite stock market indices is the VIX index. This index measures the volatility of the S&P 500. For a two year period between the middle of 2008 and 2010, there wasn’t a single occasion when the index was below 20. And in November 2008 it passed 50. As I write, the VIX stands at 12.57. It’s far from the record low, during 2017, the index was consistently below 10, but even so, looking at the index over the period since it was launched in 1990, the current reading is on the very low side. The average reading over this period was around 20.

In short, the index seems to be telling us all is well in the world. Meanwhile, the S&P 500 hits a new all time high. At the close of day, before US Independence Day, the index stood at 2995.82. The 3,000 barrier is within spitting distance. The index is up around six per cent from a year ago, it’s up by around a third over the last five years. It is up 24 per cent since the result of the US election revealed Donald Trump would be the next President, although in fairness, I should point out that the index was also rising sharply during the latter years of the Obama presidency.

As for the FTSE 100, it is 100 points off its record set a year ago, but it would not take much of a rally for it to set a record.

Looking at the list of the world’s largest companies, I notice that all, bar Alphabet/Google, have more or less made up for last year’s losses — Apple is around 10 per cent off its record, but considering at one point earlier this year, shares were 40 per cent down from the record, that isn’t bad.

There is currently only one company in the world worth over a trillion dollars and that is Microsoft, but it wouldn’t take much of a rally for Amazon and Apple to move back into the trillion dollar plus range.

Incidentally, Facebook is just five per cent shy of its record, and shares are up roughly four per cent since the peak price before the news of the Cambridge Analytica saga broke. As far as media coverage goes, the company has had a dreadful 18 months, yet investors seem largely unperturbed.

Yet, things are not alright in the world. The dangers of a trade war have not gone away. The menacing shadow of nationalism spreads across the world — as we seem unwilling to learn the lesson of history that not only does nationalism spell disaster for the global economy, it spells disaster for global peace.

While President Trump wins plaudits for his handling of North Korea, he appears determined to wage war on Iran, while cozying up to the other super power of the Muslim part of that region, despite its appalling approach to human rights.

The markets are not pricing in the risk.

There is one ray of hope, and that is technology and the fourth industrial revolution. Maybe this can create such impetus that all these negatives I refer to will be banished to that place where we dimly recollect bad dreams. But not even that is a panacea, technology may also exacerbate inequality and populism. No, I fear that that markets show insufficient fear.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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