The tumultuous seas of the stock market, historically influenced by multifaceted factors, have again been stirred, and "extreme fear" grips the U.S. investment landscape. This sentiment has been echoed by both CNN’s “Fear and Greed” index that looks at market sentiment as well as various economic analysts. Here, we dissect the causes and potential implications of this heightened anxiety.
A Return to Trepidation
According to CNN’s "Fear and Greed" index, investors in the U.S. stock market are experiencing "extreme fear" for the first time since March 15. This aligns with the backdrop of the collapse of Silicon Valley Bank earlier this year. Such indices aren't just about emotions; they're a reflection of collective investor sentiment that can significantly sway market dynamics.
The Cboe Volatility Index (VIX), colloquially known as the Wall Street's "fear gauge," peaked at 18.70 on a recent Wednesday, a point not reached since late May. And it’s not just the VIX ringing alarm bells; other metrics, such as the number of NYSE-listed stocks hitting 52-week highs versus those plummeting to 52-week lows, reinforce the narrative of escalating anxiety.
In the options market, the demand for puts (insurance against stock market losses) has outpaced the demand for calls (bets on rising stocks), revealing an investor tendency to brace for potential declines. The notable exception in this wave of caution comes from junk-bond spreads vs. investment-grade spreads, which have remained relatively stable despite climbing long-term Treasury yields.
The September Curse?
Historically, September has often been unkind to investors. Since 1928, the S&P 500 has seen drops 55% of the time during this month. While the idea of a "calendar effect" might seem peculiar in a purportedly efficient market, the financial reality of September 2023 underscores the relevance of historical patterns. But is history the only culprit?
Some posit that the underlying tremors stem from a newfound realization: high interest rates, particularly in America, are not a transient phenomenon but a lasting circumstance. This perspective was solidified by a series of monetary-policy announcements from several major central banks.
The Central Bank's Influence
Late September saw central banks, from the Federal Reserve in the U.S. to counterparts in Europe and the UK, signaling a "higher for longer" stance on interest rates. Notably, the Federal Reserve's projections indicate a policy interest rate above 5% continuing through 2024. The bond market, which has been wary of this shift, has seen the yield on two-year Treasuries grow from 3.8% in early May to 5.1%. Ten-year Treasury yields in the U.S. have touched a 16-year pinnacle of 4.5%.
For stock markets, this environment of rising interest rates presents a conundrum. While there's excitement about the potential of artificial intelligence (AI) and a robust U.S. economy, there's a growing realization that the era of cheap money might be nearing its end.
The market's recent reactions may indeed be a blend of historical biases and new economic realities. If the core concern is the sustainability of high interest rates, as echoed by central banks, then investors might need to recalibrate expectations. A belief in the temporary nature of high rates might have provided solace in the past, but the current messages from central authorities suggest a longer-term shift.
The coming months will be pivotal. As T.S. Eliot eloquently put it, April might be the "cruelest month," but for investors, the ideas of autumn might prove challenging.