PMC Market Commentary: June 27, 2014
It was another placid week for financial markets. In most walks of life, that would be just fine, but for Wall Street, it seemingly only added to anxiety. The low, low levels of volatility and risk (as measured by the Volatility Index, or VIX) has triggered a new round of questioning whether we are in an analogous period to 2007, when volatility also plunged but only as a prelude to the near-financial collapse. The Financial Times has run a series of pieces warning that we may be entering a similar phase, most recently with a piece entitled Tranquil Markets Are Enjoying Too Much of a Good Thing.
Are they? The beauty and peril of historical analogies is that you never know if they fit until they do. Today’s levels of complacency may be like 2007 in that they are masking real structural problems, or complacency may be merited by the absence of similar structural problems. It would be foolish to overlook today’s challenges, from weak job creation and jobs created that pay too little to the challenge of invigorating the growth engine of the world’s most developed and affluent economies. But that is not the same as structural fissures that will unwind in a jarring crisis.
This past week reminded us of just how challenged growth remains, with U.S. GDP for the first quarter revised down again, this time to a cringe-worthy negative 2.9%. Many factors, from the much-blamed weather to how inventories were finally assessed, went into that decline, and most economists and investors are expecting a sharp bounce-back in the second quarter. Still, the number, however provisional and limited as all these numbers are, pointed to the reality that we are likely in a new and more difficult economic normal that will not see an easy return to the levels of growth that so many Americans accustomed to the mid-20th century expect.
Nonetheless, even with the question of growth and its level unresolved, there would appear to be good reasons for the lack of market fear. Yes, and yes, and yes, bad things might happen, ranging from geopolitical uncertainties (yesterday in Ukraine, today in Iraq, tomorrow who knows) to black pools in the financial markets to too much easy money. But this may be a summer where stability and not volatility rules the day.
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