Why investors seem only shaken rather than stirred by sliding stock markets (for now, at least)

Russ Mould
20 December 2018

“America’s S&P 500 index is now down by 14% from its September all-time high but the loss since the start of the year is still only 6% so many investors can be forgiven for thinking that this is just the latest market storm that will blow over quickly,” says Russ Mould, AJ Bell Investment Director.

“And even if the market falls further, investors have been conditioned by their experiences pf the last two decades under the Greenspan, Bernanke and Yellen regimes at the US Federal Reserve to believe that the central bank will ride to their rescue, with interest rate cuts, Quantitative Easing or other unorthodox policies.

“There is little real evidence yet of investor capitulation. The VIX index – or fear index – which measures expected future volatility – may now stand above its lifetime average reading of 19.3 but at 25.5 it is still a long way from the post-crisis peaks in forties which helped to call the bottom after summer 2015’s China growth scare or this spring’s sudden stumble.

 
Source: Refinitiv data

“Investors’ use of margin debt also suggests they are still relatively confident (maybe because they think the Fed will cave in and loosen policy if the S&P 500 really does head south.

“They might be right. But they had better be because this chart shows how US margin debt is still near record highs.

 
Source: FINRA, New York Stock Exchange, Refinitiv data

“The latest data from FINRA, America’s Financial Regulatory Authority, is due shortly and it will be interesting to see whether margin debt has fallen for a fourth month in a row, not least because peaks in margin debt have historically tended to coincide with peaks in the stock market. 

“Which is the chicken and which the egg in this case is hard to divine but falling margin debt can signal falling confidence so this could be important trend to follow in the coming weeks and months, especially if the US Federal Reserve refuses to be cowed by either the President or falling financial markets and sticks instead to its plan to try and normalise monetary policy.”

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