Why Investors Aren’t Nervous About the Stock Market Right Now

Investors aren’t expecting pain to hit the stock market anytime soon. 

At least that’s what Wall Street’s so-called fear gauge is telling us. 

The CBOE Volatility Index (VIX) dropped under 12 last week–almost a five-year low–which suggests traders expect calm days ahead for equities. 

The VIX tracks options prices, which imply how much investors are hedging against risks. Since the start of 2023 it’s remained below 20, mirroring investors’ optimism coming out of the prior year’s bear market. 

And what’s not to like these days? Between a resilient economy, upbeat earnings, AI-fueled enthusiasm, and the Fed’s insistence that rate hikes aren’t happening, investors have plenty to celebrate. 

Plus, the VIX typically spikes when valuations get too frothy and the market is close to a top. That hasn’t happened yet–even as the Standard & Poor’s 500 index has notched 29 record highs this year on its way to a 14.5 percent gain. 

That ascent has been unusually mellow, too. The S&P 500 hasn’t seen a 2 percent dip in more than 300 trading sessions. 

Some analysts have pointed to mild VIX readings as a sign traders are getting complacent. A stronger-than-expected economy may be luring investors into riskier bets and habits. This line of thinking suggests that the potential for outsized returns has made hedging less of a priority, hence a tepid fear gauge.

History suggests otherwise, according to the cofounders of DataTrek Research, Nicholas Colas and Jessica Rabe. They believe today’s low VIX readings look “entirely consistent” with every multi-year bull market of the last three decades. 

“This is how markets behave when economic growth is reasonably good, Fed policy is at least somewhat predictable, and there is no obvious geopolitical or financial crisis brewing,” Colas and Rabe said. 

That said, it’s worth pointing out two cautionary details about the current market.

First, the stock rally has been undeniably narrow. Led by Nvidia, the 10 biggest stocks in the S&P 500 now make up over 36 percent of the index’s entire value, the most in over two decades, according to FactSet. 

While the VIX may not reflect the risk, if one or several of those household names collapses, the whole market could pay the price. 

Second, what happens when “bad” economic data stops being jet fuel for stocks? 

So far, any sign of a cooling economy has inspired more optimism among investors, given that soft data supports the Fed’s case for rate cuts. But it’s reasonable to expect this pattern to end at some point. 

Tom Essaye, the founder of Sevens Report Research, wrote in a Friday note that he has noticed signs that this narrative is already shifting at the margins. 

“Twice before I’ve seen investors root for bad economic data to cause the Fed to cut, and both times it hasn’t ended well over a medium-term basis,” Essaye said. “I hope this time is different, but so far it appears much the same.”