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Could Low Market Volatility be Disastrous?

October 10, 2017
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Many people look at the stock market today and think “wow, this is incredible! The markets are doing incredibly well, they’re in great shape!” They’re not wrong; the major indexes have set record upon record high this year. Their steady climb up has been almost guaranteed, as every morning investors awaken to another all time high.

But why? What is making the markets have such low volatility and such a steady gain, and is that a good thing?

According to Nobel Prize winning economist Richard H. Thaler, it is something to be worried about. In a recent interview with Bloomberg, Thaler said:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said, speaking by phone on Bloomberg TV. “I admit to not understanding it.”

His logic makes sense: Between North Korea, Brexit, the Trump presidency to mention only a few, there is a lot to be afraid of today. Yet the markets have remained consistently steady despite the news.

Thaler’s comments echo those of money manager Gina Sanchez, CEO of Chantico Global. In an interview with CNBC late last month, she also brought up many of the same argument as Thaler, saying the markets are “complacent” and that their nonstop rally has been “hard to understand.” She warns that such a trend could lead to a “volatility unwind” that could be catastrophic:

“If that starts to unwind at the same time that the markets start re-rating, you’re not just going to get a pop, you’re going to get an even bigger unwind in volatility, and it could be actually quite devastating,” she warned.

Recent market trends have been almost unprecedented and do reflect what both of these analysts are saying. While neither can put their finger on why this is happening, investors should be aware of this trend and plan accordingly. Just because the markets are going up does not mean that the underlying fundamentals are safe. Take some time to read more about this phenomenon at the provided links.

To read about Bloomberg’s interview with Professor Thaler, click here.

To read and watch CNBC’s interview with Gina Sanchez, click here.

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