If you follow the markets closely, you know that investor complacency has been heightened. Volatility is low, up days are bigger and more frequent than down days, and the few down days the market experiences have closed off of their lows. Bloomberg reports that investor complacency is near a two-decade high and reminiscent of past major market tops. Is that a reason to panic? No, but it is a faint voice among the cacophony coming from the bulls to approach the markets with caution.
If you’re an equity investor and feel like things can’t be this good, you’re probably right.
On Thursday, the MSCI World Index touched the highest since 1970, and while it’s come back a fraction, it remains elevated. The Chicago Board Options Exchange Volatility Index, or fear index, is at 11.76, close to the 30-month low it reached on Jan. 27.
This divergence has pushed the so-called complacency index, which relates the ratio between enterprise value and Ebitda in the MSCI World Index to the VIX, to its highest level in at least two decades. The gauge peaked on Jan. 27 at 1.145, but the 1.139 it logged on Tuesday is the third highest since at least 1997. The benchmark has been unusually high over the past two years thanks to the endless generosity of central banks, as I have written about before.
The recent levels are reminiscent of other highs, which were almost always followed by a significant correction. The pullback often lagged the complacency peak by a few months, but it came sooner or later.
Read more here.
Jeremy Jones, CFA
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