For one, the VIX’s own history shows that it’s not reliable at predicting
market peaks. Yes, the VIX hit a multi-year low in 2007, before the global
financial crisis. But the VIX was hitting important lows as early as 2004,
and again in 2005 and 2006. Rummaging further back in the VIX’s history
shows that the indicator was incredibly low between 1993 and 1995 – a
period that kicked off a spectacular boom in U.S. stocks (the S&P 500
Composite Index increased by more than 20% every year from 1995 to 1999).
Post-financial crisis mindset
The more important story is that we continue to live in a post-financial
crisis period. Investors, still carrying crisis-made scar tissue from 2008,
have tended to cling close to shore. Endless fears of another financial
meltdown prevail. And, each time volatility erupts, capital quickly flows
back to perceived safe assets (how else can you explain a sub-3% 30-year US
Crucially, history shows that these periods tend to be protracted affairs.
The private sector deleverages, inflation stays low, and traditional
industry is disrupted. Meanwhile, public policy fumbles around in search of
an elusive “right mix” (i.e., witness the rolling alphabet soup of credit
facilities – TARP, QE, LTROs and now frantic forays into fiscal stimulus).
Ultimately, the key observation is that post-crisis recoveries are
stretched out over long periods.
This episode has been no different. Many economic engines, like those in
the EU, are just starting to rumble. Yet, we are still left with the
haunting question: Are stocks in a bubble? Self-confessed “bubble
historian” Jeremy Grantham of investment firm GMO, in a late 2016 report,
nails the difficulty that investors face: For those “eager to see pins used
on bubbles and spoiled by the prevalence of bubbles over the last 30 years, it is
tempting to see them too often. Well, the U.S. market today is not a
classic bubble, not even close.” Bingo JG!
As card-carrying members of the change-anticipation field, we understand
the desire to divine the big turns. To be first to spot the outlines of a
looming crash can be glorious. But most warnings in the investment industry
are false alarms simply because big turns are rare events. Experts
overreact to small turns, mistaking a cyclical adjustment for the secular,
career-enhancing kind (for full disclosure, we have erred in that fashion
Occupational hazards aside, Grantham is right. There is limited evidence of
those essential properties of a classic bubble: broad investor euphoria;
stable geopolitics; and, importantly, a massive credit expansion. None
exist today, with the exception of expensive valuations in some countries
around the world (notably the U.S. stock market).
To be sure, this has been a long cycle, particularly for the U.S.. At eight
years, it ranks third out of 33 cycles recorded since 1854. But the
attendant bull market has been an unloved one.
Since 2008, global investors have endured rolling geopolitical concerns,
dramatic elections, viruses, Brexit, terrorist attacks, Trump’s erratic
tweets, etc. … and guess what? The market has been incredibly resilient.
Now try to imagine what happens if the news actually turns positive.
While we are not rabid bulls on global growth, a mild and, importantly,
globally-synchronized recovery has taken hold. Yes, volatility will move
higher and specific global asset booms and busts will rotate, but
bubble-ologists will likely have to wait another few years for an elegant
pricking of the “big one.” Or, using Grantham’s roadmap, the market is
unlikely to “go bang” in the way that recent bubbles have. Instead, “mean
reversion will be slow and incomplete. It is heartbreaking, for there will
be no histrionics, no chance of being a real hero. Not this time.”
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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