As the Dow Jones Industrial average flirts with the 20,000 plateau, investors appear to be spending the remaining days of 2016 not really worrying about the markets. But a closely watched index on future volatility shows a financial storm could be churning for 2017.
JJ Kinahan, chief market strategist at TD Ameritrade told CNBC:
“Everything about it (the market) is telling me people are kind of apathetic about what’s going to happen for the rest of the year. Next week, you may see people suddenly starting to hedge themselves against the strong dollar’s impact on U.S. earnings. The real question starts to become, as we get closer to earnings, [do] people start to hedge themselves for an overall market sell-off?”
But what about 2017? Are there hidden (or not so hidden) market dangers that will eventually force stocks to retract, derail, and lose value?
The so-called fear index indicates that investors are pretty happy right now, (and why shouldn’t they be) but volatility is expected to return next year according to the CBOE Volatility Index. The CBOE (Chicago Board Options Exchange) Volatility Index shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The CBOE Volatility Index fell below 11.5 Tuesday to its lowest level since Dec. 8, coming within half a point of the year’s low at 11.02.
An article this week on Forbes called for caution heading into next year. According to Forbes:
“Caution is warranted because markets are betting big on the best possible developments in fundamentals. First, it’s unclear what form the new president’s policies will take and how much his policies will be accepted by Congress. Trump’s program is slim on details and potentially worrisome. Furthermore, there is an argument that the long-run potential of the U.S. and other major economies is structurally and historically low, capping any upside to growth from policy. It’s not positive for risky assets to have an economy generating rising inflation while also being constrained by low to mediocre growth.”
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