The bull market in stocks is alive and well despite a slew of reasons to be worried, according to DataTrek Research.
That’s because the CBOE Volatility Index closed at a new post-pandemic low of 12.8 on Thursday.
“The ultra-low VIX is telling us that none of these concerns matter enough to offset a fundamentally strong picture for US corporate earnings,” DataTrek said.
The bull market in stocks is alive and well based on the stock market’s fear gauge, according to a Monday note from DataTrek Research.
DataTrek highlighted that the CBOE Volatility Index, better known as the VIX, closed at a post-pandemic low of 12.8 on Thursday, representing its second sub-13 close for all of 2023.
The sharp decline in the VIX has occurred even as there are plenty of risks investors are worried about.
The top risk is continued uncertainty surrounding inflation, especially given the recent rise in oil prices, and how the Federal Reserve will respond to that inflation.
Other risks include 10-year Treasury yields making new decade highs, poor seasonality trends in September and October, ongoing labor strikes at the big three automakers, and a US stock market that is concentrated in just a handful of mega-cap tech firms.
“What the ultra-low VIX is telling us is that none of these concerns matter enough to offset a fundamentally strong picture for US corporate earnings and the belief that the Federal Reserve is largely done hiking rates,” DataTrek co-founder Nicholas Colas said.
The ultra-low VIX also suggests that an imminent recession is still not on the radar for most stock investors.
“Equities are dismissing the possibility of a recession over the next 1-2 years, no matter what an inverted yield curve has historically said on that point. Moreover, if the Fed is done raising rates, then the next step will be cuts at some point,” Colas said.
While the stock market could still be choppy over the next few weeks, he concluded that a low VIX means that the bull market in stocks is doing just fine.
“We’ve been saying for several months that a low VIX is a sign that US stocks are in a bull market rather than being excessively delusional about the obvious challenges ahead,” Colas said.
One reason why stocks could be holding up better than expected as a number of risks continue to linger is the fact that corporate earnings estimates are rising, not falling. This is a key point market veteran Ed Yardeni highlighted in a note on Monday.
“Industry analysts have been raising their S&P 500 operating earnings per share estimates for 2023, 2024, and 2025,” Yardeni said.
And over the long-term, higher profits typically leads to higher stock prices.
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