Your Brain versus Your Gut

Volatility Low & Risk High: What Does This Mean?

As the U.S. stock market hits new highs, and bond yields continue baffle everyone who “knew” that interest rates were bound to rise this year, the most dramatic data point of all might be volatility, which keeps plumbing remarkable lows. And this isn’t just stock-market volatility (as measured by the VIX index), the intermarket volatility index, which averages expected volatility of stocks, bonds, currencies, oil and gold is at its second lowest reading in 20 years. What does this mean? Not sure–mixed signals. One the one hand, low volatility means that prices aren’t moving much either way, which means that […]

Should You Rebalance Today?

For much of the past year, I have argued in several blogs that bonds should be regarded as risky assets.  When ten-year Treasuries were yielding less than 2%, for example, I pointed out that this meant their prospective real return would almost certainly be negative.  On September 13, I warned about the potential for a liquidity crisis in the corporate bond market next time it encountered heavy selling pressure.  And “What Next?” posted on October 11, concluded that the various scenarios following Federal Reserve “tapering” of quantitative easing all favored the stock market over the bond market. With the year-to-date […]

Have the Markets Discounted the End of Quantitative Easing?

Conventional wisdom holds that stock and bond market prices reflect investors’ expectations about the future.  This is one of the key arguments against market timing:  not only does your view of what’s going to happen have to be right, it has to different from the consensus because that’s already priced into the market. For example, if you think rising interest rates will damage stock market prices, and therefore you should sell or reduce your stock holdings, it’s not enough to be correct, your expectation must also differ from that of most other investors. As the great British economist John Maynard […]