The Wall Street Journal | By: James Mackintosh | July 3, 2017 10:15 a.m. ET:
Unusually volatile reaction of investors to last week’s news about monetary policy is alarming in itself.
Some dates deserve a place in market history. Black Monday 1987 and Black Thursday 1929 occurred before the VIX fear gauge was created, but the volatility index’s three biggest intraday rises also resonate: August 2015’s China fears. May 2010’s flash crash. February 2007’s subprime concerns mixed with another China panic.
Last Thursday shouldn’t merit being on the list. Central bankers kind of maybe indicated that just possibly they might do what they previously said they would do, and tighten monetary policy if the economy improves.
Yet the VIX, a measure of the volatility expected over the next 30 days, had its fourth-biggest ever rise of 55% from open to peak, before recording its eighth-biggest fall from peak to close. By its low on Friday it was back in the lowest 1% of VIX readings ever. The VIX was created in 1993.
The outsize reaction to so little news tells us three things, all worrying.
- First, investors are very concerned about any signs that central banks might pull back from super-easy monetary policies.
- Second, when volatility starts to go up it can go up a lot faster than anyone thought.
- And third, complacency still rules, with “buy the dip” firmly embedded in investor psychology after an eight-year bull market.
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