Where’s the Freak Out? Tons of Bad News, But a Mostly Blissed-Out Stock Market
U.S. investors maintained a remarkably peaceful attitude toward stocks in 2012, despite a constant stream of bad news that might have rocked markets in times past. The S&P 500 is up more than 10% so far. The VIX, that infamous fear index, shows a near 5-year low level of worry even as Congress seems likely to drop us right over that fiscal cliff. And while a market freak-out remains quite possible in this climate, it’s clear that today’s investors are capable of taking even alarming news in stride.
Note that the scariest days for an S&P 500 index investor endured in 2012 involved a mere 9% drop in share prices over a few weeks in late spring. It was over in less than two months.
Fear, it seemed, was not particularly insipid in the 2012 market. The Chicago Board Options Exchange's Volatility Index, which typically goes up when investors are nervous, spent most of 2012 at levels well below previous years. The VIX even approached 5-year lows a couple of times, indicating more contentment with the future state of business than at almost any time since the financial crisis.
That’s an extraordinary picture of aplomb considering the swirl of horrific economic news this year. There were threats from European debt problems with widespread implications for U.S. corporate earnings; results of a contentious presidential election many felt sure would harm economic growth; and economic slowdown in China, which had been one of the world’s few bright spots. Early year economic indicators made the U.S. economy look stuck, and the fiscal cliff stood ready to take it back into recession. It was a recipe for bearishness.
But investors apparently chose to view U.S. shares as reasonably priced plays on a domestic economic recovery. After a shaky start to the year, a few economic indicators have supported that stance. Gains in employment and in home sales and prices especially were good for the general attitude. Economists’ 2013 market forecasts are too, for the most part. Most of the big names are forecasting 10% or more rises in the S&P 500 from here to the end of next year.
There is still plenty of time for shareholders to run panicked in the face of the world’s continuing problems, and the fiscal cliff disappointments in particular. In fact, a lot of investors are betting that they will. Shares of volatility-based exchanged traded funds like iPath’s S&P 500 VIX Short-Term (VXX) have shot higher in recent days on expectations that Congressional bumbling will cause investors to flee any minute now.
Generally, share prices this year survived the potential death of a major currency and the pointedly imminent threat of another domestic recession. Makes you wonder what it would take to shake this kind of optimism now.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.