It’s called the index of fear. The VIX measures volatility or, more precisely, the expectation of market uncertainty over the next thirty days. Investors gauge the craziness and risk of the world, then forecast how much the S&P 500 (the broadest stock market index) will move over the coming month.
This may sound decidedly unsexy, but it matters. The VIX has just plunged as never before. Check this out:
As you can see, the financial meltdown of three years ago spiked the Vix to an unprecedented 80. That’s when the doomers forecast a depression. The mayhem of August took the Vix back to about 45. And the doomers predicted a bankrupt America and financial collapse. Today the Vix has slumped to 25. In fact, last week the index of fear withered the greatest amount on record, dropping close to 20%. The doomers drove themselves home to the suburbs.
So the crisis is over, at least until the next one. Volatility won’t end, but August sure did. So did fears of a US recession, as consumer spending and business investment jump. So did the commodities rout, as demand swells and prices recover. So did war, as operations wind down in both Iraq and Libya. So did the Euro disaster, as bondholders take a haircut and the bailout pot grows.
Meanwhile corporate profits continue to augment, the OWS movement squanders its potential and it dawns on more people that stocks are priced 24% below their ten-year average, based on the money companies are actually making. This is what the Vix is trying to tell us. Also why you can come out of the bathroom now.
As this pathetic blog argued through the last 90 days, there never was any reason to panic or, God forbid, sell. The US debt ceiling impasse did not mean America was bankrupt or about to default, as so many metalheads and depressionistas argued here. It was politics. The fact Greeks are tax-evading, fiscally gluttonous, hedonistic Euro-suckers did not mean the end of Europe or the collapse of banks. And there was no damn way central bankers were going to allow anything other than a global fix to happen.
Of course, the world’s still awash in debt, the Mideast’s as stable as Charlie Sheen and the American middle class has a big self-inflicted wound. Problems abound and the gulf between those who have money and the rest of us is now an ocean. Most people are in disgusting financial shape, and will pay dearly for their addiction to real estate and borrowing.
But if you’ve been rooting for an apocalyptic settling of scores, suck it up. Ain’t happening.
It’s a reasonable bet that equity markets will continue to lurch higher, and finish the year with a decent positive return. Quite the reversal from the stockageddon we all heard about. Bonds will come down in price and rise in yield at pretty much the same time. That will make preferred shares cheaper, and you should buy a mess of them. It will also raise long-term, fixed mortgage rates, so if you’ve been thinking of locking in, this would be the moment to do so.
Above all, it’s more evidence most people do the wrong thing almost all the time.