— Volatility Has Returned. This is a gauge of mass anxiety, which has largely been absent from the stock market in recent years. In the past week, though, volatilityas measured by the VIX index, has soared – it’s up more than 300% over the past month.
Like P/E Ratios, volatility indices don’t predict the future. They only tell you what’s going on now. Are big investors nervous about higher interest rates, inflation and slower economic growth? You betcha. But that doesn’t mean any of those things will significantly imperil the world economy.
— Interest Rates are Rising. This is always a concern to stock investors. Bond yields are perennially in competition with stock returns. If investors can get a solid, guaranteed return in bonds, they move their money out of stocks.
The Federal Reserve, now under a new chairman (Jerome Powell), has signaled it may raise rates later this year and will scrap its cheap-money stimulus policy, which had been in place since 2008. Bond yields on the benchmark 10-year Treasury Note have also been pushing 3% — the highest level in four years.
The bottom line for macro-investors is that rising rates may slow an already-sluggish economy, which, in turn may depress corporate earnings. Normally that would be a paramount concern, but with corporations swimming in record amounts of cash – with more on the way from the business-friendly GOP tax law – the market’s extreme reaction may be overstated.