These figures are all the more interesting, or rather surprising, as interest rates rose across the board. Relevant central banks hiked their rates or promised more to come, and long rates rose as well, although somewhat less. In consequence, the term spread, measured as the difference between 10-year rates and two-year rates, fell to -1,06 percentage points in the US market and -0,80 in the euro area. A negative term spread this size indicates that an impending recession is a sure thing, which seems hard to square with the buoyant stock market.
Credit spreads fell, however, signalling an increased appetite for risk. And the VIX index hit a three-year low, indicating a relative absence of fear in the market. Elsewhere I have documented that the VIX does little more than reflect the past month’s volatility – the correlation is a telling 0.9. And, indeed, volatility in the S&P 500 was reduced by almost two thirds from June last year.
Simply put, in June, the stock market appeared just about as care-free as it gets. I won’t bother loading up on indicators telling us that it would be so, let alone headlines pointing in that direction. This is just another reminder of the futility of short-term market forecasts. Financial markets may not be totally random in the long run, but in the short run, they are. That’s why we focus on long-term returns.
In the meantime: Have a wonderful, care-free summer!
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